introduction classical economics and comparative advantage analysis of comparative advantage

Download Introduction Classical economics and comparative advantage Analysis of comparative advantage

Post on 02-Feb-2016

56 views

Category:

Documents

0 download

Embed Size (px)

DESCRIPTION

International Trade & the World Economy;  Charles van Marrewijk. CHAPTER 3; COMPARATIVE ADVANTAGE. Introduction Classical economics and comparative advantage Analysis of comparative advantage Production possibility frontier and autarky Terms of trade and gains from trade - PowerPoint PPT Presentation

TRANSCRIPT

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • Introduction International Trade & the World Economy; Charles van MarrewijkDavid Ricardo (1772-1823)

    Objectives / key terms

    Comparative advantage

    Production possibility frontier (ppf)

    Autarky

    Terms of trade

    Gains from trade

    World ppf

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • Classical economics and comparative advantage International Trade & the World Economy; Charles van MarrewijkOne of the few ideas in economics that is true without being obviousAccording to Paul Samuelson (1915-; Nobel prize 1970) the theory of comparative advantage isTechnological differences between nations are the classical driving force behind international trade flows.According to David Ricardo relative or comparative differences are important, not absolute differences.The idea of comparative advantage is often misunderstood, see Paul Krugman (1953-) Ricardos difficult ideaat http://web.mit.edu/krugman/www

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • 2 countries; EU and KenyaInternational trade based on differences in technologyassumptions No transport costs 2 goods; Food and Chemicals 1 factor of production; labor L Constant returns to scale; CRS Labor mobility between sectors, not between countries Perfect competitionLet be the for good F in EU, etcunit labor requirement International Trade & the World Economy; Charles van MarrewijkAnalysis of comparative advantage

  • Productivity table to summarize the state of technologyNote that the EU is more efficient than Kenya in the production of both goods, requiring 2 < 4 laborers for Food and 8 < 24 laborers for Chemicals. Why would the EU trade with Kenya? Note: EU is twice more productive in Food, and three times in Chem.In autarky (without international trade) both countries will produce both goods if consumers demand both Food and Chemicals.International Trade & the World Economy; Charles van MarrewijkAnalysis of comparative advantage

    Table 3.1 Productivity table; labor required to produce 1 unit of output

    General specification

    Example

    Food

    Chemicals

    Food

    Chemicals

    EU

    EU

    2

    8

    Kenya

    Kenya

    4

    24

    _1038659809.unknown

    _1038659821.unknown

    _1038659831.unknown

    _1038659792.unknown

  • According to David Ricardo both countries can gain from international trade through specialization (EU producing more chemicals and Kenya producing more food): Suppose Kenya produces 1 chemical less, this frees up 24 laborers.These 24 laborers can now produce 24/4 = 6 units of foodTo keep the production level of chemicals constant, the EU should make 1 chemical more. This requires 8 laborers.These 8 laborers could have made 8/2 = 4 units of food.The extra production represents gains from trade International Trade & the World Economy; Charles van MarrewijkAnalysis of comparative advantage

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • Production possibility frontier and autarky International Trade & the World Economy; Charles van MarrewijkProduction possibility frontier (ppf) = All possible combinations of efficient production points given the available factors of production and the state of technology. Note: ppf depends on available factors of production ppf depends on state of technology ppf does not depend on type of market competition

    Table 3.2 Total labor available and maximum production levels

    Total labor

    Maximum production

    available

    Food

    Chemicals

    EU

    200

    EU

    100

    25

    Kenya

    120

    Kenya

    30

    5

  • Production possibility frontier and autarky International Trade & the World Economy; Charles van MarrewijkAutarky prod. and cons. along ppf (determines autarky price ratio)

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • Terms of trade and gains from trade International Trade & the World Economy; Charles van MarrewijkBoth countries gain if international price is in between autarky pricesTerms of trade is 4.8 food per unit of chemicals

  • Terms of trade and gains from trade International Trade & the World Economy; Charles van MarrewijkOnly Kenya gains if international price is equal to EU autarky priceTerms of trade is 4 food per unit of chemicals

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • Application: Kenya and the EU International Trade & the World Economy; Charles van MarrewijkNot all exports behave in accordance with comparative advantage (but explains more trade flows than absolute advantage)

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • More countries and world ppfInternational Trade & the World Economy; Charles van MarrewijkIf we identify more countries and two goods we can calculate individual ppfs with a slope depending on comparative advantage.Combining these in a world ppf gives rise to a concave frontier (next slide)

  • More countries and world ppfInternational Trade & the World Economy; Charles van Marrewijk

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • The Balassa index II International Trade & the World Economy; Charles van MarrewijkThe Ottens (2000) calculations of the Balassa index uses the OECD countries as reference. Sometimes all countries in the world are used.Hinloopen and van Marrewijk (2001) use data on EU exports for 98 sectors to Japan to calculate the Balassa index, such that:similar trade policy access to the Japanese for all countriessimilar development levels for the EU countriessimilar distance (physical and pecuniary costs) for all countrieswhich supposedly results in a cleaner measure of comparative advantage and the probability density function of the Balassa index as depicted on the next slide.

  • The Balassa index II International Trade & the World Economy; Charles van MarrewijkThe probability density function of the Balassa-index based on monthly-moving annual observations (restricted to 0 BI 4)source: Hinloopen and van Marrewijk (2001)

  • IntroductionClassical economics and comparative advantageAnalysis of comparative advantageProduction possibility frontier and autarkyTerms of trade and gains from tradeApplication: Kenya and the EUMore countries and world ppfThe Balassa index IIConclusionsCHAPTER 3; COMPARATIVE ADVANTAGEInternational Trade & the World Economy; Charles van Marrewijk

  • ConclusionsInternational Trade & the World Economy; Charles van MarrewijkTechnological differences between countries are the classical driving force for international trade flows.Only comparative costs, not absolute costs, are important for determining the direction of trade flows.Absolute costs are important for determining a countrys welfare level.Empirical

Recommended

View more >