Absolute and Comparative Advantage. Who should produce Cars and Trucks? Why?

Slides:



Advertisements
Similar presentations
at the end of the lesson you should be able to: identify the 3 conditions of identify the 3 conditions of trade trade identify the limitations of identify.
Advertisements

Chapter 3: Comparative Advantage
Overview of the Field of International Economics International Trade –gains from trade –comparative advantage –trade barriers example: quotas International.
The Benefits of Trade by Elmer G. Wiens. Benefits of Increasing World Trade? Many people are skeptical about the benefits of trade. The Vancouver Sun’s.
Introduction Classical economics and comparative advantage Analysis of comparative advantage Production possibility frontier and autarky Terms of trade.
Theory of Theory of comparative advantage David Ricardo.
McGraw-Hill/Irwin Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Interdependence and the Gains from Trade
© 2007 Thomson South-Western, all rights reserved N. G R E G O R Y M A N K I W PowerPoint ® Slides by Ron Cronovich 3 E S S E N T I A L S O F F O U R T.
Interdependence and The Gains From Trade
INTERNATIONAL ECONOMICS Why do countries trade? Economics – A Course Companion. Bleak & Dorton, 2007, p Oxford University Press.
3 Interdependence and the Gains from Trade. Copyright © 2004 South-Western Consider your typical day: You wake up to an alarm clock made in Korea. You.
Trade Under Increasing Returns to Scale
3 Interdependence and the Gains from Trade.  Consider your typical day: You wake up to an alarm clock made in Korea. You pour yourself orange juice made.
Foundations of Modern Trade Theory: Comparative Advantage
What questions would you like to ask?. From which country does the UK import the most services? (1) Germany To which country does the UK export the most.
When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Use the production possibilities frontier to illustrate.
Absolute and Comparative Advantage A2 Economics
International Trade Countries can consume beyond their own PPF if they trade each specialise in goods with comparative advantage The rate of exchange will.
Overview Introduction Setting up the Model
International Issues.
1 MICROECONOMIC REFORM VCE ECONOMICS. 2 Microeconomic reform refers to government policies which aim to improve the individual sectors of the markets.
University of Papua New Guinea International Economics Lecture 8: Trade Models V – Modern Trade Models.
Copyright © 2004 South-Western/Thomson Learning 3 Interdependence and the Gains from Trade.
© 2009 South-Western, a part of Cengage Learning, all rights reserved C H A P T E R Interdependence and the Gains from Trade E conomics E S S E N T I A.
Trade: Factor Availability and Factor Proportions Are Key
0 Chapter 3. 1 In this chapter, look for the answers to these questions:  Why do people – and nations – choose to be economically interdependent?  How.
Principles of Economics Ohio Wesleyan University Goran Skosples Interdependence and the Gains from Trade 3. Interdependence and the Gains from Trade.
The Gains from Trade: A General Equilibrium View Between a good and a bad economist this constitutes the whole difference–the one takes account of the.
International Trade Classical Trade Theory and Comparative Advantage.
Principles of Microeconomics & Principles of Macroeconomics: Ch. 3 First Canadian Edition Interdependence and Trade Economics studies how society produces.
Unit 1: Trade Theory Heckscher-Ohlin Model 2/3/2012.
Copyright © 2004 South-Western/Thomson Learning Interdependence and the Gains from Trade.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 33 The Gains from International Trade.
Introduction: Thinking Like an Economist 1 CHAPTER 2 No one ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.
0 International Trade  Why do people – and nations – choose to be economically interdependent?  How can trade make everyone better off?  What is absolute.
ECO1000 Economics Semester One, 2004 Lecture Two.
THE ECONOMIC PROBLEM 2 CHAPTER Dr. Gomis-Porqueras ECO 680.
The Case for Trade  So far we have determined what Canada trades and with whom  We haven’t yet answered the question, why trade?  There are many.
Copyright © 2004 South-Western/Thomson Learning 3 Interdependence and the Gains from Trade.
University of Papua New Guinea International Economics Lecture 6: Trade Models III – The Heckscher-Ohlin Model.
Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 4 Resources, Comparative Advantage, and Income Distribution.
Why do countries trade? Ch 21 IB International Economics.
hair gel from Cleveland, OH
International Trade Grade 13 IBDP. International Trade Think, Pair Share List 5 reasons why Nations Trade with each other What factors influence what.
A2 Economics International Trade A2 Economics Presentation 2006.
International Trade The Law of Comparative advantage Sec. 4.1.
Chapter Seventeen The Gains from International Trade.
N. G R E G O R Y M A N K I W Premium PowerPoint ® Slides by Ron Cronovich 2008 update © 2008 South-Western, a part of Cengage Learning, all rights reserved.
EF310: International Trade and Business Lecture 17 Theories of International Trade.
Comparative Advantage & PPF Corn Wheat Because the PPF gradients are different, these two countries have different opportunity costs between Corn.
Introduction: Thinking Like an Economist 1 CHAPTER 2 No one ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.
International Trade. Syllabus Aims To understand the benefits and costs of specialisation and trade; To understand the law of comparative advantage. Students.
Model Building and Gains from Trade
INTERNATIONAL TRADE Why do nations trade?. What is international trade?  Exchange of capital goods and services across international borders.  Imports.
EF310: International Trade and Business
Why Countries Trade Chapter 1
Copyright © 2004 South-Western/Thomson Learning 3 Interdependence and the Gains from Trade.
Chapter 8 – Free Trade 8.1 What is Trade?
Study Unit 4.
Interdependence and the Gains from Trade
INTERNATIONAL TRADE.
The Positive Economist Susan Hayes PDST Economics Conference ‘International Trade’ 2nd October 2010.
Interdependence and the Gains from Trade
Labor Productivity and Comparative Advantage: The Ricardian Model.
Chapter 37 International Trade Gains from Trade/Terms of Trade
Film and Ben International Trade.
Absolute v. Comparative Advantage
Presentation transcript:

Absolute and Comparative Advantage

Who should produce Cars and Trucks? Why?

Comparative advantage Economic theory suggests that, if countries apply the principle of comparative advantage, combined output will be increased in comparison with the output that would be produced if the two countries tried to become self-sufficient and allocate resources towards production of both goods.

Comparative advantage

Opportunity cost ratios It is being able to produce goods by using fewer resources, at a lower opportunity cost, that gives countries a comparative advantage.

The principle of comparative advantage says that total output will be greatest when each good is produced by the nation that has the lowest domestic opportunity cost for that good.

Opportunity cost Truck Cars 1.Расчитайте Альтернативные издрежки при произвостве товаров 2.Сделайте вывод

Opportunity cost Truck Cars

Расчитайте Альтернативные издержки для данного случая 1.Кто должен производить Y, а кто X? 2.Сделайте вывод

Identical PPFs

 External costs  Comparative advantage is not a static concept  Structural unemployment  Many different goods and services  Diminishing returns  Food security  Relative prices and exchange rates  Production of variety of goods

Задание Зайдите на сайт Economicsonline.co.uk Объясните каждую из причин, почему концепция Сравнительно преимущества не всегда отражает действительность

Criticisms: 1. External costs It may overstate the benefits of specialisation by ignoring a number of costs. These costs include transport costs and any external costs associated with trade, such as air and sea pollution.external costs

2. Diminishing returns The theory also assumes that markets are perfectly competitive - in particular, there is perfect mobility of factors without any diminishing returns and with no transport costs. perfectly competitive diminishing returns The reality is likely to be very different, with output from factor inputs subject to diminishing returns, and with transport costs. This will make the PPF for each country non- linear and bowed outwards.

PPF is non-linear and bowed outwards

Curved PPF For example, it may be that the maximum output of cars produced by country A is only 20 million (compared with 30), and the maximum output of trucks produced by country B might only be 16 million instead of 21 million. Hence, the combined output from trade might only be 46 million units (instead of the 51 million units initially predicted).

3. Structural unemployment Complete specialisation might create structural unemployment as some workers cannot transfer from one sector to another. structural unemployment

4. Relative prices and exchange ratesexchange rates Relative prices and exchange rates are not taken into account in the simple theory of comparative advantage. For example if the price of X rises relative to Y, the benefit of increasing output of X increases.exchange rates

5. Comparative advantage is not a static concept Comparative advantage is not a static concept - it may change over time. For example, nonrenewable resources can slowly run out, increasing the costs of production, and reducing the gains from trade. Countries can develop new advantages, such as Vietnam and coffee production. Vietnam Despite having a long history of coffee production it is only in the last 30 years that it has become a global player. seeing its global market share increase from just 1% in 1985 to 20% in 2014, making it the world's second largest producer.

6. Food security Many countries strive for food security, meaning that even if they should specialise in non-food products, they still prefer to keep a minimum level of food production.food security

7. Many different goods and services The principle of comparative advantage is derived from a highly simplistic two good/two country model. The real world is far more complex, with countries exporting and importing many different goods and services.

8. Production of variety of goods According to influential US economist Paul Krugman, the continual application of economies of scale by global producers using new technology means that many countries, including China, can produce very cheaply, and export surpluses.Paul Krugman This, along with an insatiable demand for choice and variety, means that countries typically produce a variety of products for the global market, rather than specialise in a narrow range of products, rendering the traditional theory of comparative advantage almost obsolete.

However… The underlying principle of comparative advantage can still be said to give some ‘shape’ to the pattern of world trade, even if it is becoming less relevant in a globalised world.