I. Trade in the History of Thought.
a. David Hume (1758): “Of the Balance of Trade”.
b. Adam Smith (1776): Mercantilism “bullion” or gold.
C David Ricardo (1817): Political Economy of Taxation. Comparative Advantage. “On Foreign Trade”. Corn Laws.
d. Hecksher-Ohlin (1930s). Builds on comparative advantage.
II. Goals of International Economics: To understand;
a. Gains from trade.
b. Patterns of trade.
c. Autarcic Policies and their implications.
d. Exchange rates.
e. Policy formulation.
f. Flow of funds.
III. A Quick Note on Monetary Issues.
Chapter 2: World Trade
I. Size of Global Trade.
a. It’s an excess of 20 trillion.
b. Major US trade partners; 1. Canada, 2. China, 3. Mexico.
c. Trade will get bigger and more important. ASEAN.
II. Who trades with whom?
a. Gravity Model.
Asserts that trade between 2 countries is all other things, proportional to the product if their GDPs and diminishes with distance. No surprise US trades more with Canada than South Africa.
The general form of the gravity model is; (see equation is paper)
b. Some important questions about the gravity model;
1. Why does it work? i. large economies – large incomes and large imports. ii. large economies – attract large foreign spending
Produce more goods that the rest of the world wants. iii. Since large economies have higher potential for imports and exports, then trade is bound to be more frequent between relatively larger economies.
2. What hope do small economies have? i. Negotiate preferential trade status with larger economies. ii. Form economic and customs unions (no tariffs) to synchronize trade and increases its size.
c. Issues with the model. i. Significant reduction in transportation costs. ii. Infrastructure and geography are ignored.
d. Impediments to trades:
The Ricardian Models 1/15/13 (one factor: labor)
I. Comparative Advantage
a. A country has comparative advantage if it has the lowest opportunity cost of producing 1 product in relation to the cost of production in other countries.
b. Trade can be beneficial if countries specilize in the production of those goods in which they have the comparative advantage is the key to the Ricardian model.
II. One factor Economy:
i. Simple economy = “Home” ii. 2 goods in wine (w) cheese ( c0 iii. Technology at Home = labor productivity per industry. iv. Labor Productivity = unit labor requirement (measured in