(1)Global Development 4 Trade Models
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School
The University of Hong Kong**We aren't endorsed by this school
Course
GEOG 2030
Subject
Economics
Date
Dec 18, 2024
Pages
8
Uploaded by BaronDanger2941
PlanBasic Theory ofComparativeAdvantage40 MinutesBreak10 MinutesExtensions20 MinutesThe Case For FreeTrade35 MinutesWorld Tour~20 MinutesQ & A~10 MinutesOverview -- Theories SectionWeeks 4-7 cover key theories in international development. Theories are acoherent set of understandings that provide meaning or clarity to a set offacts. They exist outside of facts, and may provide guidance to actors whennecessary facts are not available. Lunchbox A has has pasta and a hotdog, Lunchbox B has Pizza andChocolate. The kids trade half ofeach to get more varietyKid’s Version of Trade (1)Kid’s Version of Trade (2)Brazil grows Bananas in its tropicalclimate, Spain grows cherries in itsmore varied climate, so the twocountries trade.
But Should the Strong Trade WithThe Weak?You don’t need a theory to explain why countrieswith different fruits trade with each other, but it isharder to understand why a stronger partner wouldtrade with a weaker one. Comparative advantage is such a theory.David RicardoRicardian Comparative AdvantageDemonstrates the benefits oftrade among unequal partnerVoice against mercantilist,colonial trade of the time Voice of transition to inter-empire trade.Output from 1 Square Meter of LandSpain ChileCherries100 Units of Cherries50 Units of CherriesCopper100 Units of Copper25 Units of CopperSetup: Stronger and a WeakerCountry, Cherries and CopperStarting with the conclusionAssuming a two-commodity economy, Chile shouldspecialize in one commodity and trade, even thoughit is more productive than Spain.
Assumptions of Ricardian TradeModel2 Countries, 2 Goods, determines trading patternOne factor of production (i.e. labor or land butnot both)Focused Entirely on “Supply Side” (i.eproduction)“Perfect Competition” (i.e. no excess profits)Workers can move across sectors within acountry but not between countries.There are constant returns to scale ( tradersdon’t get more productive as they producemore)Opportunity Cost- The Secret ofComparative Advantage ModelLosses implied by not selecting agiven course of action Opportunity Costs: Lecture Time vsAlternativesLower Test Grade,Less LearningFun, Comfort,Physical FitnessGlobal Production Without Trade : Whatto do with two square meters of land?Output from 1 Square Meter of LandTotalProductionChileSpainCherries1 Square Meter,100 Cherries1 Square Meter, 50Cherries150 CherriesCopper1 Square Meter,100 Copper1 Square Meter 25Copper120 Copper
AutarkyAn economy that operates withouttrade is under autarky. Theseeconomies produce all of theresources that they consumeMercantalism was an economicregime that promoted autarky. Absolute versus ComparativeAdvantageAbsolute Advantage: When a potential trader has aproductivity advantage inproduction of a good (canproduce more units of outputper unit of input)Comparative Advantage:When a potential trader canproduce a good at a loweropportunity cost than itspartners.Opportunity Cost Per Square Meterof LandOpportunity Cost Per Sq Meter of LandChileSpainCherries100 Copper25 CopperCopper100 Cherries50 CherriesChile has equivalent opportunitycosts, Spain’s Opportunity Costfor copper is lowestGlobal Production With Trade : What todo with two square meters of land?Land Use/ OutputTotalProduction,After TradeTotalProduction,BeforeTradeChileSpainCherries.75 Meters, 75Cherries2 Meters, 100Cherries175 Cherries150 CherriesCopper1.25 Meters,125 Copper125 Copper120 CopperChile exports cherries toSpain. Spain Total outputgrows by 25 cherries and 5copper. (This outcome gets more ofboth commodities)
What are the terms of trade?PreTradePostTradeChileImportsSpainImportsCherries1000150CherriesCopper050120CopperPreTrade100Cherries,100Copper50 Cherries,25 CopperPostTrade120Cherries103Copper55Cherries27 CopperTerms of trade will be a range.Each trader will only trade ifthey pay lower opportunitycost for imports than theywould pay on their own.Spain needs to pay < .5 copperper unit of cherries (Here .49)Chile needs to pay < 1 to importcherries per unit of copper(Here .97 because it is onlyimporting 20 cherries)What are the terms of trade?PreTradePostTradeChileImportsSpainImportsCherries1000150CherriesCopper050120CopperPreTrade100Cherries,100Copper50 Cherries,25 CopperPostTrade120Cherries103Copper55Cherries27 CopperFinal terms of trade reflectabsolute advantage. Chileconsumes more of each thanSpain.So, each country is better offbut Spain is still relativelybetterComparative Advantage at theIndividual LevelGordon Ramsay is anexcellent cook, and alsothe head of manyworldwide operations.Economically speaking,how , much of his dayshould he take fromcooking to manage?Round 2, Comparative AdvantageBananas and FishMarginal Revolution University
Multiple Goods, Requires MoreMathHeckscher-Ohlin SetupDeveloped by two Swedish economists Ricardian trade with multiple factors of production within aneconomyHow are trading patterns related to the relative supply offactors of production within each economy?Explains dynamics within a countryTwo countries, two goods, twofactors of production (i.e. capitaland labor)Free entry of labor betweensectors within a countryGoods differ in factor intensity(customer support and steel)Heckscher-Ohlin AssumptionsThe relative price of each factor islower in the economy where thatfactor is more abundant.In the more labor-intensivecountry, call centers will becheaper to operate ; in the capital-intensive country, steel plants willbe cheaper. From autarky, trade will happenbetween factor-abundant sectorsand workers will move accordinglyHeckscher-Ohlin Conclusions
The Casefor FreeTradeEvidence on Tradeand GrowthCultural BenefitsStraw ManArgumentsGlobal Trade Growth Coincides withGlobal GDP GrowthLinkHigher Exporting Countries GrowMoreLinkLinkChinese Exports Drove itsIndustrialization
Economic DependenceDiscourages Political Conflict (SeeGolden Arches Theory)Cultural Arguments 1Trade makes cultural exchange inthe trader’s self-interest. Wouldyou rather study another languageor consume its products?Cultural Arguments 2Trade transmits knowledge frommore developed countries to lessdeveloped countriesCultural Arguments 3Wages are Set NationallyEmployment is ConstantTrade Does Not need to beBalancedMathematical Models areClarifyingKrugman on Misconceptions