Lecture 5: How Trade Creates Wealth (2)   Benjamin Graham

Housekeeping No class Friday Homework 1 is due next class Wednesday September 6 Lecture 5: Winners/Losers Within Countries Benjamin Graham

Reading Quiz (1) According to the Factor Endowment Theory: A) A nation will export a product that uses a locally abundant resource in its production B) A nation will import a product that uses a locally scarce resource in its production C) A nation will import a product that uses a locally abundant resource in its production and will export a product that uses a locally scarce resource in its production D) Both A and B Lecture 5: Winners/Losers Within Countries Benjamin Graham

Reading Quiz (2) If the U.S is abundant in human capital (skills) related to scientific/engineering talent, but unskilled labor is scare; and India has a relative abundance in unskilled labor but lacks the skills, then according to the factor-endowment theory: a) the U.S will export large amounts of high-end electrical machinery and equipment b) India will export large amounts of high-end electrical machinery and equipment c) the U.S will export large amounts of apparel and toys d) India will import large amounts of apparel and toys. Lecture 5: Winners/Losers Within Countries Benjamin Graham

Reading Quiz (3) According to Stolper/Samuelson: A. The demand curve moves left when a complementary product increases in price B. When the price of a product increases, so does the income earned by owners of the factor of production used intensely to produce that product. C. Tariffs and quotas are substitutes -- i.e. they achieve very similar effects D. Factors of production decline in productivity according to the marginal rate of transformation Lecture 5: Winners/Losers Within Countries Benjamin Graham

Clicker Question Mutually advantageous trade will occur between the United States and the United Kingdom so long as one ton of steel trades for: a. At least 1 television, but no more than 2 televisions b. At least 2 televisions, but no more than 3 televisions c. At least 3 televisions, but no more than 4 televisions d. At least 4 televisions, but no more than 5 televisions

There are more than two products, yo Rank the products by the degree of comparative cost Each country produces (and exports) the products in which they have the greatest comparative advantage

There are more than two countries, yo Multilateral trade

Who wins, who loses? If the UK and the US decided to start trading with each other, who loses out? A. Winemakers in the US and clothmakers in the UK B. Clothmakers in the US and winemakers in the UK C. Clothmakers in the UK only D. Everyone in the UK Lecture 3: Comparative Advantage Benjamin Graham

What determines comparative advantage? Factor endowments -- land, natural resources, weather... Saudi Arabia has a comparative advantage in producing oil Florida has a comparative advantage producing oranges Past investments -- how much of what type of capital you have Education, infrastructure, factories, machinery Lecture 3: Comparative Advantage Benjamin Graham

Review and Application An aid organization buys grain in the US and ships it to a village in a developing country that is experiencing a drought. What happens to the price of grain in the area? What happens to the price of corn in that area? What happens to the price of grain back in the US? Which of the following actors gain, and who loses? Consumers of food in the drought-stricken region Producers of food (i.e. farmers) in the drought-stricken region Consumers of food in the US Producers of food in the US Lecture 2: Supply, Demand, etc. Benjamin Graham

Factor Endowments Theory It is efficient to make something when inputs are cheap Inputs are cheap when they are abundant So countries make a product efficiently when that product requires factors of production that are locally abundant Note: Abundance is relative, rather than absolute. Why start with supply and demand? Lecture 5: Winners/Losers Within Countries Benjamin Graham

Factor Endowments Theory Why start with supply and demand? Lecture 5: Winners/Losers Within Countries Benjamin Graham

Who has what? Why start with supply and demand? What type of countries are capital abundant? Answer: Rich countries (especially small, scarcely populated ones) e.g. Lichtenstein, Denmark What type of countries are land abundant? Answer: Big countries & natural-resource rich countries (particularly poor and scarcely populated ones) e.g. Mongolia, Sudan What type of countries are labor abundant? Populous countries (especially small, poor ones) e.g. Philippines, Bangladesh Why start with supply and demand? Lecture 5: Winners/Losers Within Countries Benjamin Graham

Capital Stock per Worker in 1997 Why start with supply and demand? Lecture 5: Winners/Losers Within Countries Benjamin Graham