CDAE 272
International Economic
Development
Spring 2008
Class 14
Feb. 28
Last class
4. International trade theories
Quiz 4
Today:
Result of Quiz 4
4. International trade theories
Review for the midterm exam
Next class (Thursday, March 6):
Midterm exam, 10:55am – 12:20pm
Reading: Chapter 4: International trade theories
Important date: Midterm exam, Thursday, March 6
Result of Quiz 4
N = 37
1.
2.
3.
4.
Range = 6 – 10
Average = 8.5
Name three government interventions in a market.
A ceiling price below the equilibrium price hurts all producers
A floor price above the equilibrium price hurts all consumers
A price subsidy increases CS, PS and (CS+PS) but decreases the
total welfare (CS+PS-Sub. Cost)
5. A sales tax decreases both CS and PS, increase tax revenue, and
decreases the total welfare (CS+PS+Tax Rev.)
6. Supply and demand
(a) Graph the supply and demand functions
(b) P* = Q* =
(c) PS = 9 when a ceiling price of $4 is imposed
Take-home exercise
(Thursday, Feb. 21)
Suppose a market has the following supply and
demand functions
Demand: Qd = 17 - 1.5 P
Supply: Qs = -1 + 0.5 P
(a) What are the equilibrium quantity (Q*) & price (P*)?
(b) What are the CS and PS at the equilibrium?
(c) If a price subsidy of $0.8 per unit is imposed, what
will be the changes in CS, PS and total welfare
(CS + PS - sub. cost)?
4. International trade theories
4.1.
4.2.
4.3.
4.4.
4.5.
4.6.
4.7.
4.8.
Simple examples: two-person cases
Absolute and comparative advantages
Trade between two countries
The sources of comparative advantage
Other explanations for international trade
Trade between two nations
Measurement of the gains from trade
Exchange rate and its determination
4.2. Absolute and comparative advantages:
4.2.3. Theory of comparative advantage
-- Absolute advantage is neither the
“necessary” nor “sufficient” condition for
trade
-- Comparative advantage is the “necessary”
and “sufficient” conditions for trade.
-- Two-person examples in Section 4.1
4.2. Absolute and comparative advantages:
4.2.4. David Ricardo (1772-1823):
-- A businessman, economist, policymaker, and one
of the fathers of modern economics
-- Major publication: Principles of Political
Economy and Taxation, 1817
-- Major contribution: theory of comparative
advantage
-- History:
-- In the early 19th century, British Parliament was
controlled by landlords  “Corn Laws” limit
grain imports and help exports  high price
-- Industrial Revolution  needs to reduce grain
prices
-- Corn Laws were replaced in 1848 (25 yrs after
Ricardo’s death)
4.3. Trade between two countries
4.3.1. Wheat and cotton production in Australia and
New Zealand (Table 16.2 on p. 3-4)
Wheat
Cotton
New Zealand
6 bu./acre
2 bales/acre
Australia
2 bu./acre
6 bales/acre
4.3.2. Absolute advantage
Australia: Cotton production
New Zealand: Wheat production
4.3.3. Production with no trade (Table 16.3 in reading)
-- How to interpret Figure 16.1?
-- Production possibility frontier (PPF)
4.3. Trade between two countries
4.3.4. Gains from specialization and trade (Table 16.4)
When both countries have absolute advantages,
specialization and trade can benefit both nations
A strong assumption here: 1 bushel of wheat can
be exchanged for 1 bale of cotton
How to interpret Figure 16.2?
4.3. Trade between two countries
4.3.5. Suppose the wheat and cotton productivity in
Australia and New Zealand has changed to:
Wheat
Cotton
New Zealand
6 bu./acre
6 bales/acre
Australia
1 bu./acre
3 bales/acre
4.3.6. New Zealand has the absolute advantage in
both wheat and cotton production (Australia
does not have any absolute advantage) but
Australia has the comparative advantage in
cotton production (what comparative
advantage does New Zealand have?)
4.3.7. Production with no trade (Table 16.6)
4.3. Trade between two countries
4.3.8. Gains from specialization and trade (Table 16.7)
Although Australia does not any absolute
advantage, specialization and trade can benefit
both nations because both nations have
comparative advantages
4.3.9. Data on production costs:
Wheat
Cotton
Country A
$3/bu.
$6/bale
Country B
$2/bu.
$8/bale
Country A has an absolute advantage in __ production
and a comparative advantage in __ production.
Country B has an absolute advantage in __ production
and a comparative advantage in __ production.
Class exercise
(Thursday, Feb. 28)
Data on production costs:
Wheat
Cotton
Country C
$3/bu.
$6/bale
Country D
$2/bu.
$5/bale
Which country has the absolute advantage in wheat production?
Which country has the absolute advantage in cotton production?
Which country has the comparative advantage in wheat production?
Which country has the comparative advantage in cotton production?
Can specialization and trade benefit both countries? If yes, which
country is likely to export wheat?
Midterm exam
1. What will be covered in the exam?
2. What will be the format?
3. What are the study materials and practice problems?
4. What do you need to bring to the exam?
5. Suggestions
Midterm exam
1. What will be covered in the exam?
-- Chapters 1, 2, 3 and part of Chapter 4
-- Approximate distribution:
Chapter 1
Chapter 2
Chapter 3
Chapter 4 (4.1-4.3)
15 -- 20%
25 -- 30%
30 -- 40%
20 -- 25%
Midterm exam
2. What will be the format?
-- Multiple-choice questions (about 30-35 points)
(e.g., impacts of a price subsidy)
-- Short-answer questions (about 20-25 points)
(e.g., what does PPP mean)
-- Problems (about 25-35 points)
(e.g., calculate GNP, GDP, PS and CS)
-- Graphical analysis (about 15-20 points)
(e.g., draw a graph and explain the impacts of a floor
price)
Midterm exam
3. What are the study materials and practice
problems?
Quiz 1 to Quiz 4
Class exercises
Take-home exercises
Class examples
Lecture notes (class 01 -- class 14)
Problem sets 1 and 2 (pick up your problem set 2 Monday, March 3)
Reading for chapters 1, 2, 3 and 4
Midterm exam
4. What do you need to bring to the exam?
-- Your calculator
-- A ruler will be helpful
-- No formula sheet is needed
Midterm exam
5. Suggestions
a. Go over each quiz and make sure you understand
and know how to answer each question in each quiz
b. Go over each class exercise and take-home exercise
and make sure you understand and know how to
answer every question
c. Go over the lecture notes, especially for the classes
you missed
d. Go over your problem sets and Chapters 1-4 readings
e. Study hard and feel confident!