1 chapter i introduction to international trade classical theories of international trade...
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CHAPTER I INTRODUCTION TO CHAPTER I INTRODUCTION TO INTERNATIONAL TRADEINTERNATIONAL TRADE
Classical Theories of International TradeClassical Theories of International Trade– MercantilismMercantilism– Absolute AdvantageAbsolute Advantage– Comparative AdvantageComparative Advantage
Interactions Between an Exporter and an Interactions Between an Exporter and an ImporterImporter
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MercantilismMercantilism
16th to 18th centuries in Europe16th to 18th centuries in Europe More exports than importsMore exports than imports Trade surplus------> More gold and silverTrade surplus------> More gold and silver Protectionism------> Reduced Protectionism------> Reduced
international tradeinternational trade
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Absolute AdvantageAbsolute Advantage Adam Smith: 1776Adam Smith: 1776
– An Inquiry into the Nature and Causes of the An Inquiry into the Nature and Causes of the Wealth of NationsWealth of Nations
– Goods and services available to citizens rather Goods and services available to citizens rather than gold and silver.than gold and silver.
Should not produce all items a country Should not produce all items a country needsneeds
Should produce & export goods at an Should produce & export goods at an absolute advantage and import goods not absolute advantage and import goods not at an absolute advantageat an absolute advantage
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Absolute AdvantageAbsolute Advantage
Free Trade---> International division Free Trade---> International division of labor --->More output to all trading of labor --->More output to all trading partnerspartners
Natural Advantage: Climate and Natural Advantage: Climate and natural resourcesnatural resources
Acquired Advantage: Product and Acquired Advantage: Product and process technologyprocess technology
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Absolute Advantage
Two countries Mexico USA
Resources available 100 100
To produce 1 ton of tomatoes 4 10
To produce 1 ton of beans 20 2
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Absolute Advantage
When each country uses a half of its resources,50,
per product
Two Countries Mexico USA Total
Tomato production
12.50 5.00 17.50 M/T
Bean production 2.50 25.00 27.50 M/T
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Absolute Advantage
When each country uses all resources,100, only for a product at an absolute advantage
Two Countries Mexico USA Total
Tomato production
25.00 0.00 25.00 M/T
Bean production
0.00 50.00 50.00 M/T
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Absolute Advantage
27.50 M/T25.002.50Bean production
17.50 M/T5.0012.50Tomato production
TotalUSAMexicoTwo Countries
27.50 M/T25.002.50Bean production
17.50 M/T5.0012.50Tomato production
TotalUSAMexicoTwo Countries
50.00 M/T50.000.00Bean production
25.00 M/T0.0025.00Tomato production
TotalUSAMexicoTwo Countries
50.00 M/T50.000.00Bean production
25.00 M/T0.0025.00Tomato production
TotalUSAMexicoTwo Countries
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Comparative Advantage David Ricardo: 1817 “On the Principles of Political Economy & Taxation” When a country does have or does not have an absolute
advantage on two products, Produce and export one product at a comparative
advantage, relatively greater advantage than other product. Import the other product not at a comparative advantage.
– Gives up less efficient production & allocates more resources to more efficient production due to limited resources
– Basis for economic development of less developed countries
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Comparative Advantage
Productivity comparison between two countries
Two countries Mexico USA
Resources available 100 100
To produce 1 ton of tomatoes
2 10
To produce 1 ton of beans
4 8
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Comparative Advantage
When each country uses a half of its resources,50, per product without trade
Two Countries
Mexico USA Total
Tomato production
25.00 5.00 30.00 M/T
Bean production
12.50 6.25 18.75 M/T
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Comparative Advantage
When Mexico produces only tomatoes and USA produces only beans and trade
Two Countries
Mexico USA Total
Tomato production
50.00 0.00 50.00 M/T
Bean production
0.00 12.50 12.50 M/T
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Comparative Advantage To make a comparison easier, if Mexico produces
30 tons of tomatoes by using 60 resources
Two countries
Mexico USA Total
Tomato production
30.00 0.00 30.00 M/T
Bean production
10.00 12.50 22.50 M/T
Increased production: 3.75 (22.50-18.75) M/T of bean
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Comparative Advantage
If Mexico produces 6.25 tons of beans by using 25 resources to make the total production of beans 18.75 tons
Two countries Mexico USA Total
Tomato production
37.50 0.00 37.50 M/T
Bean production
6.25 12.50 18.75 M/T
Increased production: 7.5(37.50-30.00) M/T of tomato
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18.75 M/T6.2512.50Bean production
30.00 M/T5.0025.00Tomato production
TotalUSAMexicoTwo Countries
18.75 M/T6.2512.50Bean production
30.00 M/T5.0025.00Tomato production
TotalUSAMexicoTwo Countries
Increased production: 3.75 (22.50-18.75) M/T of bean
22.50 M/T12.5010.00Bean production
30.00 M/T0.0030.00Tomato production
TotalUSAMexicoTwo countries
Increased production: 3.75 (22.50-18.75) M/T of bean
22.50 M/T12.5010.00Bean production
30.00 M/T0.0030.00Tomato production
TotalUSAMexicoTwo countries
Increased production: 7.5(37.50-30.00) M/T of tomato
18.75 M/T12.506.25Bean production
37.50 M/T0.0037.50Tomato production
TotalUSAMexicoTwo countries
Increased production: 7.5(37.50-30.00) M/T of tomato
18.75 M/T12.506.25Bean production
37.50 M/T0.0037.50Tomato production
TotalUSAMexicoTwo countries
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Assumptions:
Absolute and Comparative Advantage Limited resources
No transportation costs
No mobility of resources between countries
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Interactions Between Exporter & Importer
Exporter Overseas Importer U.S.A.
Inquiry <-----------------------------------------------
Offer(Quotation) ---------------------------------------------->
Acceptance <-----------------------------------------------
Order <-----------------------------------------------
Letter of Credit <-----------------------------------------------
Shipping Docs ----------------------------------------------->
Payment <-----------------------------------------------
Customs Clearance X
Distribution X