International Economics & Trade Theory CIA4U – Unit 5

Globalization DEFINED: the increasing international flow of “stuff” DEFINED: the increasing international flow of “stuff” –goods & services –production and manufacturing –people –information & ideas –culture –diseases

Globalization International trade theory tells us: International trade theory tells us: –increased trade between countries will make us ALL better off –trade is good –specialization is good –trade barriers (tariffs, taxes, fees) are bad (economically-speaking) Similar to “free market” theory Similar to “free market” theory

Globalization and Trade Theory David Ricardo – 1817 David Ricardo – 1817 –outlined mutual benefits of trade Example: Example: –Two nations, England and Portugal; two goods being produced – wine and cloth –Ceteris paribus conditions: full employment full employment full use of resources full use of resources no changes in technology no changes in technology perfect competition perfect competition no international migration of resources no international migration of resources

Globalization and Trade Theory – An Example If they dedicated all resources to wine: If they dedicated all resources to wine: –England: 100 bottles –Portugal: 400 bottles If they dedicated all resources to cloth: If they dedicated all resources to cloth: –England: 100 tonnes –Portugal: 200 tonnes

Globalization and Trade Theory With the same amount of labour, Portugal is better able to produce both goods With the same amount of labour, Portugal is better able to produce both goods –This is called an absolute advantage Think about each country’s opportunity cost Think about each country’s opportunity cost –Portugal’s OC of 400 wine = not making 200 cloth (2 wine: 1 cloth) –England’s OC of 100 wine = not making 100 cloth (1 wine: 1 cloth) Who should make wine? Who should make wine? Who should make cloth? Who should make cloth?

Globalization and Trade Theory Thus: Thus: –England is less productive (ceteris paribus) overall than Portugal, but at home is less worse at producing cloth than wine –Might seem like Portugal should just make its own cloth and wine… BUT BUT –if England specializes in making cloth (called its comparative advantage) –Portugal specializes in wine –The two countries trade their products, and both are overall better off!

Production Before Trade WineCloth England5050 Portugal Total250150

Production After Specialization and Trade WineCloth England0100 Portugal30050 Total300150

Consumption After Trade WineCloth England7550 Portugal Total300150

Was it Worth it? Pre-trade and specialization Pre-trade and specialization –England: 50 wine, 50 cloth –Portugal: 200 wine, 100 cloth Post-trade and specialization Post-trade and specialization –England: 75 wine, 50 cloth –Portugal: 225 wine, 100 cloth

Globalization and Current Issues Classify world’s countries in three levels of development: Classify world’s countries in three levels of development: –Industrialized/developed (i.e. Canada, France, Japan) –Newly industralized (i.e. Mexico, China) –Developing (i.e. Kenya) or underdeveloped (i.e. Sierra Leone)

Issues What do “rich” countries have to trade? What do they want? What do “rich” countries have to trade? What do they want? What do “poor” countries have to trade? What do they want? What do “poor” countries have to trade? What do they want?

Simulation Carry out trade simulation Carry out trade simulation Debrief Debrief –Positives? Negatives?