1. Extension of Trade Theory
Chapter 1
Extension of Trade Theory

2. Extension of Trade Theory
Comparative advantage & its relationship with globalization
Production possibilities frontier & trade theory

3. 1.1 Production possibilities frontier & trade theory
A. Production possibilities frontier (PPF)
B. Trade theory

4. A. Production possibilities frontier
To learn about the PPF
To understand the slope of the PPF reflects opportunity cost
To analyze how changes in the quantity of resources & production technology affect the PPF
To explain why the PPF is concave to the origin

5. What is a production possibilities frontier?
Shows the locus of the maximum output combinations of two goods given the existing resources endowment & technological level.

6. The opportunity cost of production
Marginal cost of the good on the x-axis = Slope of the PPF
Assumption: Marginal cost is constant.
PPF is a downward sloping line.
Production point
Good X (units)
Good Y (units) A 6 B 1 4 C 2 D 3
The slope of the PPF is the marginal cost of the good on the x-axis.
The maximum output combinations of goods that are attainable.

7. Changes in the PPF Change in resources
in resources  Parallel outward shift of PPF

8. Changes in the PPF Advancement in technology
Advancement in technology  Intercept of the PPF 

9. PPF is concave to the origin
Diminishing marginal returns
= The marginal cost will finally rise
 PPF is generally concave to the origin

10. B. Trade theory To understand the consumption choice under autarky
To learn about the trade line
To examine how international trade expands consumption possibilities
To explain comparative costs & gains from trade with the PPF

11. Trade theory Consumption choice in an autarky economy
The consumption possibilities frontier shows the locus of the maximum combinations of consumption of an economy.

12. Trade theory Trade line
Trade line: A straight line passing through the production point, which shows the consumption opportunities brought by trade.
Slope of trade line
= Terms of trade
= Relative price of Good X
Blue area: The increased consumption possibilities with trade.

13. Trade theory Changes in consumption possibilities
Specialization and trade according to the principle of comparative advantage further expand consumption possibilities.
Blue area: The increased consumption possibilities.
Trade line
= Consumption possibilities frontier

14. Two-country model Comparative cost Country A:
Comparative advantage & specialization in producing Y.
Country B:
Comparative advantage & specialization in producing X.

15. Two-country model Gains from trade
Assumptions: (1) specialization according to comparative advantage; (2) there is trade; (3) terms of trade: 1X = 1Y
Consumption possibilities 
Total gains from trade:
2X & 2Y
Country A
Country B

16. 1.2 Comparative advantage & its relationship with globalization
A. What is economic
globalization?
B. The effects of globalization

17. A. What is economic globalization?
To understand the concept of economic globalization
To analyze comparative advantage & its relationship with globalization
To examine the controversies over economic globalization

18. What is economic globalization?
The process of which international trade and production activities across countries or regions become more frequent.

19. Integration of worldwide markets
Goods markets
(1) International trade  (3) Firms: competition 
(2) Trade barriers  (4) Consumers: choice 

20. Integration of worldwide markets
Financial & investment markets
(1) Capital flow across countries 
(2) Global expansion of financial markets 
(3) Foreign direct investment (FDI) 

21. Integration of worldwide markets
Labour market
(1) Immigrants & imported labour 

22. Integration of worldwide markets
Labour market
(2) Outsourcing / relocation of tasks 

23. Integration of worldwide markets
Labour market
(3) Networked labour market 
Firms: Production costs 
Workers: Job opportunities  Competition 

24. Globalization of production activities
Changes in the nature of international division of labour
The specialization of the part of a good which a country or region has a comparative advantage in the global production chain.

25. Globalization of production activities Dynamic comparative advantage
The comparative advantage in a good or component part will shift from one region to another along with changes in economic development.

26. Globalization of production activities
The expansion of the organization & scale of enterprises
Through foreign direct investments, the scope of expansion of large enterprises is extended from developed countries to emerging markets.

27. Globalization of production activities
The increasingly networked business models
Online trading
Online
Bookshop
Online
Shopping
Online
auction
Online
Payment

28. International economic cooperation
(1) International organizations that promote global trade and
economic cooperations.
(2) Arrangements that facilitate regional economic cooperation.
(3) The formulation & implementation of international standards.

29. B. The effects of globalization
To learn about the gains from trade brought by globalization
To analyze the effects of globalization on labour, income distribution & capital flow across countries
To analyze the effects of globalization on multinational enterprises, small enterprises & consumers

30. The effects of globalization
Gains from trade
Consumers: Choice 
World output 
Average production cost 
Prices 
Globalization:
(1) Enhances economic growth.
(2) Gives consumer more choices.

31. The effects of globalization
Employment opportunities & income 
A change in income distribution
(1) Economic restructuring
(2) Labour demand & supply 
(3) Differences in the mobility of production resources

32. The effects of globalization
Effects of capital flow across countries
(1) Enhancing global economic growth
(2) Financial risks 
Market competition 
Environmental conservation 

33. End of Chapter 1