Outline for 10/17: International Trade 1
Basic Concepts
Govt. Options wrt International Trade
Absolute and Comparative Advantage
Factoral Model
Some Basics of International Trade
Definition – exchanges of goods/services across national borders
Actors – Corporations and Governments
Exports (X) –
Goods out
Money in
Imports (I) –
Money out
Goods in
Trade Deficit X<M
Trade Surplus X>M
Country with trade deficit?
County with trade surplus?
More Basics of International Trade
Current Account – keeps track of exports and imports
exports are a credit and imports are a debit
Capital Account – keeps track of other financial flows in/out of a national economy
inward investments are a credit and outward investments are a debit
A Current Account Deficit must be offset by Capital Account Surplus
What is US situation in terms of its current and capital accounts?
Government Options wrt International Trade
Autarky
Laissez-faire
(free trade)
Forms of trade protection
Restrictions on Imports:
Tariffs
Quotas
Product standards
Mechanisms to promote exports:
Subsidies
Undervalued currency
Dumping
What are the costs of trade protection?
Why do governments nonetheless often choose to protect/close their markets?
Comparative vs. Absolute Advantage
Absolute advantage in production – compares two countries in terms of one product
a country has an absolute advantage if it can produce more of a given product
(or produce it at lower cost) than another country.
Comparative advantage in production – compares two countries in terms of two different
products
a country has a comparative advantage in a particular product when its
opportunity cost for producing that product is lower than another country’s.
Differences in comparative advantage create the basis for international trade
countries should produce only their comparative advantage products,
sell the surplus to other countries, and
use the profits to buy other products in which they lack comparative advantage.
Example
2 countries (USA and Ghana) and 2 products (food and movies)
If all production If all production
devoted to food devoted to movies
USA
400
100
Ghana
100
10
400
350
Ghana
USA
300
food
250
200
150
100
50
0
0
10
20
30
40
50
movies
60
70
80
90
100
How do we know in what kinds of products a country has comparative advantage?
Look at factors of production
4 factor model:
Land/natural resources (R)
Labor (L)
Capital (K)
Human capital (HK)
Different countries have different endowments in terms of these 4 factors
Abundant factors – those that are well-supplied, can be obtained at low cost.
Scarce factors – those that not well-supplied, can only be obtained at high cost
Country
United States
EU, Japan
Most LDCs
India, China
Abundant factors
Scarce factors
Country
Abundant factors
Scarce factors
United States
R, K, HK
L
EU, Japan
K, HK
L, R
Most LDCs
R, L
K, HK
India, China
R, L, HK
K
What kinds of products require lots of land/natural resources (R) and labor (L)?
What countries should produce them?
Who should not?
What kinds of products require lots of capital (K) and human capital (HK)?
What countries should produce them?
Who should not?
Country
Abundant factors
Scarce factors
United States
R, K, HK
L
EU, Japan
K, HK
L, R
Most LDCs
R, L
K, HK
India, China
R, L, HK
K
This factor model explains a lot about international trade
1. Which producers (in which countries) benefit from international trade and which
producers (in which countries) are harmed by international trade
2. Why the United States tends to favor free trade
3. Divisions in the current Doha round of international trade negotiations between
developed and developing countries