Elective Part 2 (1) Extension of Trade Theory
Elective Part 2 (1) Extension of Trade Theory
Extension of
Trade Theory
Comparative advantage
& its relationship with
globalization
Production possibilities
frontier & trade theory
Elective Part 2 (1) Extension of Trade Theory
1.1 Production possibilities frontier
& trade theory
A.
B.
Production possibilities
frontier (PPF)
Trade theory
Elective Part 2 (1) Extension of Trade Theory
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
Elective Part 2 (1) Extension of Trade Theory
What is a production
possibilities frontier?
Production possibilities frontier:
Shows the locus of the maximum
output combinations of two goods
given the existing resources
endowment & technological level.
Elective Part 2 (1) Extension of Trade Theory
Marginal cost of the good on the
x-axis = Slope of the PPF
Assumption: Marginal cost is constant.
Production
point
Good X
(units)
Good Y
(units)
A
0
6
B
1
4
C
2
2
D
3
0
PPF is a downward
sloping line.
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.
Elective Part 2 (1) Extension of Trade Theory
Change in resources
 in resources
 Parallel outward shift of PPF
Elective Part 2 (1) Extension of Trade Theory
Advancement in technology
Advancement in technology
 Intercept of the PPF 
Elective Part 2 (1) Extension of Trade Theory
PPF is concave to the origin
Diminishing marginal returns
= The marginal cost will finally rise
 PPF is generally concave to the origin
Elective Part 2 (1) Extension of Trade Theory
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
Elective Part 2 (1) Extension of Trade Theory
Consumption choice in an
autarky economy
The consumption possibilities
frontier shows the locus of the
maximum combinations of
consumption of an economy.
Elective Part 2 (1) Extension of 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.
Elective Part 2 (1) Extension of 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
Elective Part 2 (1) Extension of Trade Theory
Comparative cost
Country A:
Comparative advantage &
specialization in producing Y.
Country B:
Comparative advantage &
specialization in producing X.
Elective Part 2 (1) Extension of Trade Theory
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
Elective Part 2 (1) Extension of Trade Theory
1.2 Comparative advantage & its
relationship with globalization
A.
B.
What is economic
globalization?
The effects of globalization
Elective Part 2 (1) Extension of Trade Theory
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
Elective Part 2 (1) Extension of Trade Theory
What is economic
globalization?
The process of which
international trade and
production activities
across countries or
regions become more
frequent.
Elective Part 2 (1) Extension of Trade Theory
Goods markets
(1) International trade 
(3) Firms: competition 
(2) Trade barriers 
(4) Consumers: choice 
Elective Part 2 (1) Extension of Trade Theory
Financial & investment
markets
(1) Capital flow across countries 
(2) Global expansion of financial markets 
(3) Foreign direct investment (FDI) 
Elective Part 2 (1) Extension of Trade Theory
Labour market
(1) Immigrants & imported labour 
Elective Part 2 (1) Extension of Trade Theory
Labour market
(2) Outsourcing / relocation of tasks 
Elective Part 2 (1) Extension of Trade Theory
Labour market
(3) Networked labour market 
Firms: Production costs 
Workers: Job opportunities  Competition 
Elective Part 2 (1) Extension of Trade Theory
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.
Elective Part 2 (1) Extension of Trade Theory
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.
Elective Part 2 (1) Extension of Trade Theory
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.
Elective Part 2 (1) Extension of Trade Theory
The increasingly networked business models
Online trading
Online
auction
Online
Bookshop
Online
Payment
Online
Shopping
Elective Part 2 (1) Extension of Trade Theory
(1)
(2)
(3)
International organizations that promote global trade and
economic cooperations.
Arrangements that facilitate regional economic cooperation.
The formulation & implementation of international standards.
Elective Part 2 (1) Extension of Trade Theory
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
Elective Part 2 (1) Extension of Trade Theory
Gains from trade
Consumers: Choice 
World output 
Average production cost 
Prices 
Globalization:
(1) Enhances economic growth.
(2) Gives consumer more choices.
Elective Part 2 (1) Extension of Trade Theory
Employment opportunities & income 
A change in income distribution
(1) Economic restructuring
(2) Labour demand & supply 
(3) Differences in the mobility of production resources
Elective Part 2 (1) Extension of Trade Theory
Effects of capital flow across countries
(1) Enhancing global economic growth
(2) Financial risks 
Market competition 
Environmental conservation 
Elective Part 2 (1) Extension of Trade Theory