International Economics & Trade Theory CIA4U – Unit 5.

International International Economics & Trade Economics & Trade TheoryTheory

CIA4U – Unit 5CIA4U – Unit 5

GlobalizationGlobalization

DEFINED: the increasing DEFINED: the increasing international flow of “stuff”international flow of “stuff”– goods & servicesgoods & services– production and manufacturingproduction and manufacturing– peoplepeople– information & ideasinformation & ideas– cultureculture– diseasesdiseases

GlobalizationGlobalization

International trade theory tells us:International trade theory tells us:– increased trade between countries increased trade between countries

will make us ALL better offwill make us ALL better off– trade is goodtrade is good– specialization is goodspecialization is good– trade barriers (tariffs, taxes, fees) trade barriers (tariffs, taxes, fees)

are bad (economically-speaking)are bad (economically-speaking) Similar to “free market” theorySimilar to “free market” theory

Globalization and Globalization and Trade TheoryTrade Theory David Ricardo – 1817David Ricardo – 1817

– outlined mutual benefits of tradeoutlined mutual benefits of trade Example:Example:

– Two nations, England and Portugal; two Two nations, England and Portugal; two goods being produced – wine and clothgoods being produced – wine and cloth

– Ceteris paribus conditions: Ceteris paribus conditions: full employmentfull employment full use of resourcesfull use of resources no changes in technologyno changes in technology perfect competitionperfect competition no international migration of resourcesno international migration of resources

Globalization and Globalization and Trade Theory – An Trade Theory – An ExampleExample If they dedicated all resources to If they dedicated all resources to

wine:wine:– England: 100 bottlesEngland: 100 bottles– Portugal: 400 bottlesPortugal: 400 bottles

If they dedicated all resources to If they dedicated all resources to cloth:cloth:– England: 100 tonnesEngland: 100 tonnes– Portugal: 200 tonnesPortugal: 200 tonnes

Globalization and Globalization and Trade TheoryTrade Theory With the same amount of labour, Portugal is With the same amount of labour, Portugal is

better able to produce both goodsbetter able to produce both goods– This is called an This is called an absolute advantageabsolute advantage

Think about each country’s Think about each country’s opportunity opportunity costcost– Portugal’s OC of 400 wine = not making 200 cloth Portugal’s OC of 400 wine = not making 200 cloth

(2 wine: 1 cloth)(2 wine: 1 cloth)– England’s OC of 100 wine = not making 100 cloth England’s OC of 100 wine = not making 100 cloth

(1 wine: 1 cloth)(1 wine: 1 cloth)

Who should make wine? Who should make wine? Who should make cloth?Who should make cloth?

Globalization and Globalization and Trade TheoryTrade Theory Thus:Thus:

– England is less productive (ceteris paribus) overall England is less productive (ceteris paribus) overall than Portugal, but at home is less worse at than Portugal, but at home is less worse at producing producing clothcloth than wine than wine

– Might seem like Portugal should just make its own Might seem like Portugal should just make its own cloth and wine…cloth and wine…

BUT BUT – if England specializes in making cloth (called its if England specializes in making cloth (called its

comparative advantagecomparative advantage) ) – Portugal specializes in winePortugal specializes in wine– The two countries trade their products, and both The two countries trade their products, and both

are overall better off!are overall better off!

Production Before Production Before TradeTrade

WineWine ClothCloth

EnglandEngland 5050 5050

PortugalPortugal 200200 100100

TotalTotal 250250 150150

Production After Production After Specialization and Specialization and TradeTrade

WineWine ClothCloth




Consumption After Consumption After TradeTrade

WineWine ClothCloth




Was it Worth it?Was it Worth it?

Pre-trade and specializationPre-trade and specialization– England: 50 wine, 50 clothEngland: 50 wine, 50 cloth– Portugal: 200 wine, 100 clothPortugal: 200 wine, 100 cloth

Post-trade and specializationPost-trade and specialization– England: 75 wine, 50 clothEngland: 75 wine, 50 cloth– Portugal: 225 wine, 100 clothPortugal: 225 wine, 100 cloth

Globalization and Globalization and Current IssuesCurrent Issues Classify world’s countries in three Classify world’s countries in three

levels of development:levels of development:– Industrialized/developed (i.e. Industrialized/developed (i.e.

Canada, France, Japan)Canada, France, Japan)– Newly industralized (i.e. Mexico, Newly industralized (i.e. Mexico,

China)China)– Developing (i.e. Kenya) or Developing (i.e. Kenya) or

underdeveloped (i.e. Sierra Leone)underdeveloped (i.e. Sierra Leone)

IssuesIssues

What do “rich” countries have to What do “rich” countries have to trade? What do they want?trade? What do they want?

What do “poor” countries have to What do “poor” countries have to trade? What do they want?trade? What do they want?

SimulationSimulation

Carry out trade simulationCarry out trade simulation DebriefDebrief

– Positives? Negatives?Positives? Negatives?

International Economics & Trade Theory CIA4U – Unit 5.

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