International Trade Theory Absolute & Comparative Advantage

The Benefits Of Trade Smith, Ricardo and Heckscher-Ohlin show why it is beneficial for a country to engage in international trade even for products it is able to produce for itself International trade allows a country: to specialize in the manufacture and export of products that it can produce efficiently import products that can be produced more efficiently in other countries

Absolute Advantage Export those goods and services for which a country is more productive than other countries Import those goods and services for which other countries are more productive than it is

The Theory of Absolute Advantage: An Example Wine21 Clock radios 35 France Japan OUTPUT PER HOUR OF LABOR

Absolute Advantage’s Flaw What happens to trade if one country has an absolute advantage in both products? No trade would occur

Comparative Advantage Produce and export those goods and services for which it is relatively more productive than other countries Import those goods and services for which other countries are relatively more productive than it is

The Theory of Comparative Advantage: An Example Wine41 Clock radios 65 France Japan OUTPUT PER HOUR OF LABOR

The Theory of Comparative Advantage: An Example Wine54 Clock radios 65 France Japan OUTPUT PER HOUR OF LABOR

Adam Smith ( ) is the most known economist of all times. In the work “Research of the nature and the reasons of the peoples wealth » (1776) he described a system of economic knowledge. Describe- описать

A.Smith made an essential contribution to the study of the cost of goods. According to A.Smith, cost of the goods is defined only by work. This concept, the labor theory of cost, was going to play a huge role in the history of an economic science for it answered a question of wealth According to -по мнение the labor theory of cost- трудовая теория стоимости sources. (источник)

A.Smith investigated the theory of money, the income, the capital, division of labor and reproduction. Reproduction - воспроизводство

David Ricardo ( ) continued traditions of classical political economy, having developed further A.Smith's ideas. D. Ricardo released the theory of labor cost from internal contradictions. labor cost- трудовая стоимость Release- освободить Internal contradiction – внутренное противоречие.

He proved that cost is defined socially by necessary work. D. Ricardo explained the process of transferring the cost of means of production on a finished product. It was D. Ricardo's contribution to an economic science.

Heckscher (1919)-Ohlin (1933)  Differences in factor endowments not on differences in productivity determine patterns of trade  Absolute amounts of factor endowments matter

Heckscher (1919)-Olin (1933) Labor is not the only Factor of production. We need to account for land, capital, and technology. Factor endowments: extent to which a country is endowed with such resources as land, labor, and capital. Export goods that intensively use factor endowments which are locally abundant.

Theory of Relative Factor Endowments (Heckscher-Ohlin)  Factor endowments vary among countries  Products differ according to the types of factors that they need as inputs  A country has a comparative advantage in producing products that intensively use factors of production (resources) it has in abundance

Factor Endowments Taken from Heckscher-Olin Basic factors: natural resources climate location demographics Advanced factors: communications skilled labor research technology