The Positive Economist Susan Hayes PDST Economics Conference ‘International Trade’ 2nd October 2010

What is “ absolute advantage”? A situation where a country can produce a good cheaper

When is the law of Comparative Advantage Used? In a case where a country is more efficient than another, in a number of goods, it should specialise in the one where it has the greatest comparative advantage and trade for its other needs.

“Comparative Advantage” situations for your students You may have been good at a number of subjects for your Junior Cert, but you pick out your best to study for your Leaving Cert You might like many clothes in a shop, but you only pick the number of items that you can afford and that you like best On buying a mobile phone, any of them will let you call and text. However, you pick out the one with the most functionality or the cheapest payment options

In each case, you could study, enjoy or use any of what’s on offer, but how you pick out the best for YOU?!

How do we work out quantifiably what a country is “most efficient” at? Calculate who can produce the most outputs in a year! Example: Crepes Bodhrans Ireland 1000 2000 France 500 250

Who is the most efficient? Ireland can make more of both Crepes and Bodhrans than France Ireland can make (1000/500) 2 times as many Crepes as France Ireland can make (2000/250) 8 times as many Bodhrans as France Since 8 > 2 Ireland should specialise in the production of Bodhrans

Difficulty Students find it confusing to group together goods and countries Use one colour pen for one country to identify a country and specialised good Choose countries with colours and subsequently goods associated with them to aid this process! For kinaesthetic students, bring in some things to represent the explanation Encourage them to have an example ready to use as illustration in the exam

Example Continued Ireland specialises in Bodhrans France specialises in Crepes

What is the result of Specialisation? Each country doubles it’s production of the good that it specialises in! Crepes Bodhrans Ireland 4000 France 1000

Remember!! When you took on a lesser number of subjects for Leaving Cert than for Junior Cert, you could give more time to those areas. The very same logic applies here too...

What is the result of Specialisation? In Ireland, if we chose not to produce crepes, then we could make 2000 extra Bodhrans. However, if France decided not to produce any more crepes, they could only produce an extra 250 Bodhrans. Which is the bigger number – 2000 or 250?

As a result…….. The world is a more efficient place with more bodhrans in production if the country with comparative advantage chooses to specialise in it

Assumptions of the Law of Comparative Advantage... and their relevance to Ireland

Free Trade Customs duties Quotas Other Restrictions (Differences between EU and Non-EU countries)

No Transport Costs No Transport Costs Ireland is only connected by sea and air to the rest of the world May impact (or eradicate) comparative advantage  

Factors of Production are Mobile Costs and stumbling blocks to immediately stopping and starting production Capital Training Land Machinery  

Constant Returns to Scale Cut production of one good automatically doubles that of another Factors of Production inputs versus Product outputs

Benefits will Flow Throughout the Economy Obsoleteness of factors of production Capital Training Machinery

What are the sources of Comparative advantage? Mild Climate Ireland( meat & dairy products) Fertile Land Geography – Land & Climate Highly trained Highly motivated Japan & Ireland (electronics) Flexible Skills & Attitude to Work

What are the sources of Comparative Advantage? Government Actions Corporation Tax Ireland (Multinationals) Low Wages Minimum Wage Poland (Zloty) Vs Euro

Comparative Advantage & Terms of Trade What is the opportunity cost of a Bodhrans? Opportunity Cost = Production of good you want to compare Base Good Production Opportunity Cost = Bodhran Production Crepe Production Ireland’s opportunity cost: 2000/1000 =2 France’s opportunity costs: 250/500 = 0.5 One Bodhrans will be exchanged for between 0.5 and 2 units of crepes

Comparative Advantage & Terms of Trade Index of Exports Prices * 100 Index of Import Prices

What is the trend over a number of years? Calculate the formula for a number of years Has the figure moved up or down?

What would cause the Irish terms of trade to change? A change in the price or volume of a major import (cotton for clothes in Penny's) A change in the price or volume of a major export (tourism in Ireland) A change in the value of the currency (the value of sterling)

What is the effect of a favorable movement in the Terms of Trade The purchasing power of our exports increase If the currency strengthens, our exports become more expensive If the prices of imports decrease: Prices of domestic goods decrease (i.e. deflation or lower inflation) Foreign goods become more competitive

Some World Economics

Some World Economics Who holds the coveted position of the second biggest economy in the world? Japan - GDP of $1.28tn  China - GDP of $1.33tn

Some World Economics: Germany Total unemployment is to drop below 2.8 m GDP increased by more than 1.5% in Q2 Exports accounted for 41% of German GDP in 2009, compared with 13% in Japan and 11% in the US. Since the launch of the euro in 1999, German workers had seen a meagre 12% rise in wages