MGMT389 Summer2015 Lectures Lecture 3 Trade Theory

8/18/2019 MGMT389 Summer2015 Lectures Lecture 3 Trade Theory

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Lecture 3CLASSICAL TRADE THEORYCharles Hill Chapter 6

UOWDSummer Semester 20!


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This chapter answers the following questions:

(i) What constitutes

the basis for trade that is why do

nations export and import certainproducts(ii) At what terms of trade are products

exchanged in the world market?

(iii) What are the gains frominternational trade in terms of

production and consumption?


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THE "ASIC #UESTIO$S O%I$TER$ATIO$AL TRADEWhat is the &asis '( tra)e*T+' a,s+ers t' this -uesti', +ill &e)iscusse) +ith the help '( THEORIES '(.

A&s'lute A)/a,tae a,) 1 C'mparati/e A)/a,tae

What are the ai,s (r'm tra)e*The m')els '( the THEORIES '( .

A&s'lute A)/a,tae a,)1C'mparati/e A)/a,tae

sh'+ that the ai,s (r'm tra)e are.i,crease) c',sumpti', ai,e) thr'uh

specialiati', i, pr')ucti', a,) tra)e


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THE 4ERCA$TILISTS What is +ealth*

The 4erca,tilist a,s+er +as the st'c5 '( preci'usmetals p'ssesse) & a c'u,tr

H'+ ca, preci'us metals &e '&tai,e)*E7tracti', (r'm ,aturall 'ccurri, st'c5s

Ear, preci'us metals thr'uh e7p'rts '( '')s a,)ser/ices

Si,ce pame,t ('r e7p'rts is ma)e +ith preci'us

metals8 e7p'rti, causes preci'us metals t' 9'+ i,t' a

c'u,tr

Similarl8

si,ce pame,t ('r imp'rts is als' ma)e +ith preci'us

metals8 imp'rti, causes preci'us metals t' 9'+'ut '( c'u,tr


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THE 4ERCA$TILISTSH'+ ca, preci'us metals &e '&tai,e)*

The ,atural c',clusi', :

e7p'rts must e7cee) imp'rts ('r a c'u,tr t' &ec'me +ealth;

Ca, this c',)iti', h'l) ('r all c'u,tries*

$';

There('re8 the +ealth '( ',e c'u,tr must

c'me at the e7pe,se '( a,'ther c'u,tr4erca,tilist p'lic

4erca,tilists a)/'cates '/er,me,t

reulati', '( tra)e i, the ('rm '(. Tari


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CRITICIS4 O% 4ERCA$TILISTSDa/i) Hume=s

>rice : specie 9'+ )'ctri,e

%a/'ura&le tra)e : p'ssi&le i, sh'rtru,

I,9'+ '( ?'l) a,) Sil/er

I,crease m',e i, circulati',

>rice i, E,la,) +'ul) i,crease relati/et' tra)i, part,ers

E,la,)=s E7p'rts +'ul) )ecli,e

E,la,)=s Tra)e Surplus )ecli,e


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CRITICIS4 O% 4ERCA$TILISTS(i@ 4erca,tilist : Static ie+ '( W'rl) Ec','mBie8 W'rl)s Wealth is 7e)@

Bii@ Tra)e is a er'Fsum ame B',e ,ati', ai,s atthe e7pe,se '( the 'ther@

O,e ,ati', must l'se ('r 'ther t' +i,

A)am Smith BGG2FG0@ Wealth '( $ati',s

W'rl)=s +ealth ,'t 7e)

I,ter,ati',al Tra)e >atter,s permit

Specialisati',

Di/isi', '( La&'ur Be7ample '( ma,u( '( api,@

I,crease i, e,eral le/el '( pr')ucti/it +ithi,

a c'u,tr


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ADA4 S4ITHC'st Di


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ADA4 S4ITH THEORY O% ALUE

Bi@ La&'ur is the ',l (act'r '(pr')ucti', a,)

la&'ur is h'm'e,e'us

Bii@ C'st 'r price '( a ''))epe,)s e7clusi/el ', theam'u,t '( la&'ur re-uire) t'

pr')uce it


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A&s'lute A)/a,taeSmith (1776) - countries difer in theirability to produce goods eciently

A country has an A&s'luteA)/a,tae in the production o aproduct when it is more ecient thanany other country in producing it

According to Smithtrade is ,'t a er'Fsum ame

c'u,tries sh'ul) specialie in theproduction o goods or which they hae

an a&s'lute a)/a,ta e and then


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A&s'lute A)/a,taeAssume that two countries! "hana and South #orea! bothhae 200 u,its '( res'urces that could either be used toproduce rice or cocoa

$n "hana! it ta%es 0 u,its '( res'urces to produceone ton o cocoa and 20 u,its '( res'urces to produceone ton o &ice

A&s'lute A)/a,tae

So! ?ha,a c'ul) pr')uce 20 t',s '(c'c'a and ,' rice! or

0 t',s '( rice a,) ,' c'c'a! or s'me

c'm&i,ati', '( rice a,) c'c'a betweenthe two e'tremes


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A&s'lute A)/a,tae$n South #orea it ta%es K0 u,its '( res'urcesto produce ',e t', '( c'c'a and 0

res'urces t' pr')uce ',e t', '( riceSo! S'uth 'rea c'ul) pr')uce ! t',s'( c'c'a and ,' rice!

'r 20 t',s '( rice a,) ,' c'c'a! orsome combination in between

?ha,a has a, a&s'lute a)/a,tae in the production

o c'c'aS'uth 'rea has a, a&s'lute a)/a,tae in the

production o rice


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A&s'lute A)/a,tae

Table 5!: Absolute Ad"antage

and the #ains from Trade


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Absolute AdantageWith'ut tra)e?ha,a +'ul) pr')uce 0 t',s '( c'c'a a,)

! t',s '( rice

S'uth 'rea +'ul) pr')uce 0 t',s '( ricea,) 2! t',s '( c'c'a

With Tra)e$ each c'u,tr specialies in the product inwhich it has an a&s'lute a)/a,tae and trades or theother product

?ha,a would produce 20 t',s '( c'c'aS'uth 'rea would produce 20 t',s '( rice


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Absolute AdantageSupp'se

?ha,a could tra)e 6 t',s '(

c'c'a to S'uth 'rea ('r 6 t',s '(rice

A(ter tra)e

?ha,a would hae K t',s '(c'c'a le(t8 a,) 6 t',s '( rice

S'uth 'rea +'ul) ha/e K t',s

'( rice le(t a,) 6 t',s '( c'c'a


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A&s'lute A)/a,tae$igure 5!: The Theor% of Absolute Ad"antage


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omparatie AdantageRicar)' BMG@ - what happens when onecountry has an absolute adantage in theproduction o all goods

Ricar)'=s the'r o c'mparati/ea)/a,tae - a country should specialie i,the pr')ucti', o those goods that itpr')uces m'st eNcie,tl and buy thegoods that it produces less eciently rom othercountries

e/e, i( this mea,s &ui, '')s(r'm 'ther countries that it c'ul)

pr')uce m're eNcie,tl itsel(


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omparatie Adantage

Assume

?ha,a is m're eNcie,t in the

production o &'th c'c'a a,) rice$n ?ha,a! it ta%es 0 res'urces t'pr')uce ',e t',e '( c'c'a8 a,)

3 3 res'urces t' pr')uce ',et', '( riceSo! ?ha,a could produce 20 t',s '(c'c'a and ,' rice! ! t',s '( rice and,' c'c'a! or some combination o the two


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omparatie Adantage$n S'uth 'rea! it ta%es K0 res'urcest' pr')uce ',e t', '( c'c'a and 20

res'urces t' pr')uce ',e t', '( riceSo! S'uth 'rea c'ul) pr')uce !t',s '( c'c'a and ,' rice! 0 t',s '( rice

a,) ,' c'c'a! or some combination o the two

$ each c'u,tr specialies in theproduction o the good in which it has a

c'mparati/e a)/a,tae and trades or the

other! &'th c'u,tries +ill ai,

H'+ D'es The


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H'+ D'es TheThe'r O(

C'mparati/eA)/a,tae W'r5*


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C'mparati/e A)/a,tae

With tra)e

?ha,a c'ul) e7p'rt K t',s '( c'c'a toSouth #orea i, e7cha,e ('r K t',s '( rice

?ha,a +ill still ha/e t',s '( c'c'a!and K a))iti',al t',s '( rice

S'uth 'rea still has 6 t',s '( rice a,) Kt',s '( c'c'a

i( each c'u,tr specialies i, thepr')ucti', o the good in which it has ac'mparati/e a)/a,tae and trades or

the other! &'th c'u,tries ai,


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H'+ D'es The The'r O(C'mparati/e A)/a,tae W'r5*

C'mparati/e a)/a,tae

the'r proides a str', rati',aleor e,c'urai, (ree tra)e

t'tal 'utput is hiher

&'th c'u,tries &e,et

rade is a p'siti/e sum

ame


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omparatie Adantage*igure +,. he heory o omparatie Adantage


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Is U,restricte) %ree Tra)eAl+as "e,ecial*

/nrestricted ree trade is bene0cial! but the gains maynot be as great as the simple model o comparatieadantage would suggest

imm'&ile res'urces

)imi,ishi, retur,s

),amic e


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Heckscher-Ohlin Theory

Hec5scher a,) Ohli, -c'mparati/e a)/a,tae arises rom)i


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What Is TheHec5scherFOhli, The'r*

The patter, '( tra)e is )etermi,e)& (act'r e,)'+me,ts

Hec5scher a,) Ohli, predict thatcountries will

e'port goods that ma%e intensie

use o l'call a&u,)a,t (act'rsimport goods that ma%e intensieuse o actors that are locally

scarce


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The Le',tie( >ara)'7

Le',tie( B!3@ - since the US was relatielya&u,)a,t i, capital! it would be an e7p'rter '( capitali,te,si/e '')s and a, imp'rter '( la&'rFi,te,si/e

'')s3eontie ound h'+e/er8 that US e7p'rts +ereless capital i,te,si/e tha, US imp'rts

>'ssi&le e7pla,ati',s ('r these ,)i,s i,clu)e

that the US has a special a)/a,tae in producing

products made with i,,'/ati/e tech,'l'ies that areless capital i,te,si/e

)i


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he 4roduct 3ie ycle heory

er,', Bmi)F60s @ proposed the pr')uctli(eFccle the'r - as products mature both thelocation o sales and the optimal production location will

change a


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he 4roduct 3ie ycle heory5er time! demand or the ,e+ pr')uct startst' r'+ i, 'ther a)/a,ce) c'u,tries ma5i, it+'rth+hile ('r ('rei, pr')ucers t' &ei,pr')uci, ('r their h'me mar5ets

US rms might als' set up pr')ucti',acilities in those a)/a,ce) c'u,tries where)ema,) is r'+i, limiti, the e7p'rts

(r'm the USAs the mar5et i, the US a,) 'ther a)/a,ce),ati',s matures8 the pr')uct becomes more

sta,)ar)ie)! and price &ec'mes the

mai, c'mpetiti/e +eap',


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he 4roduct 3ie ycle heory4roducers based in adanced countries where la&'r

c'sts are l'+er tha, the U,ite) States might nowbe able to e7p'rt t' the US

$ c'st pressures &ec'me i,te,se! )e/el'pi,c'u,tries &ei, t' ac-uire a pr')ucti',a)/a,tae '/er a)/a,ce) c'u,tries he /nited States switches rom being an

e7p'rter '( the pr')uct to an imp'rter'( the pr')uct as production becomes morec',ce,trate) i, l'+erFc'st ('rei,l'cati',s

The


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The>r')uct

Li(e CcleThe'r


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E/aluati, The >r')uct Li(e Ccle The'r

hile the product lie cycle theory accuratel e7plai,s+hat has happe,e) ('r pr')ucts li5eph't'c'piers and a number o other high technologyproducts deeloped in the /S in the 168s and 178s! the

increasing l'&aliati', and i,terati', '( the +'rl)economy has made this the'r less /ali) in today2s world

today! many new products are initially introduced in Papa,

'r Eur'pe! or are i,tr')uce) simulta,e'usli, the US8 Papa,8 a,) Eur'peproduction may also be )isperse) t' th'se l'cati',s+here it is m'st (a/'ra&le

MGMT389 Summer2015 Lectures Lecture 3 Trade Theory

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