BE(Chapter 3)

Resource reasons
• (2) Natural resources
• • • •
(3) Skilled workers (4) Capital resources (5) Favorable geographic location and transport costs (6) Insufficient production
10.0 5.0 2.5 10.0 Total production 12.5 15.0 Production with specialization
Ghana South Korea
Total production
20.0 0.0 20.0
0.0 20.0 20.0
Cocoa
20
G
10 K 5
A
B 2. 5 0 5 G’ 10 K’ 20
Rice
Ghana South Korea
Consumption after Ghana trades 6 tons of Cocoa for 6 tons of South Korea rice Cocoa Rice 14.0 6.0 6.0 14.0 Increase in Consumption as a result of specialization and trade Cocoa Rice
Chapter 3
Trade and Investment Environment
Part I International Trade
How would you define international trade? • International trade can be defined as the exchange of goods and services produced in one country for those produced in another country.
• 3)Political reasons
•
• 4)Patterns of demand
• Even if there are no differences among countries in their capacities at producing goods, consumption preference may make exchange become possible.
Cocoa
20
G C C A K B D K’ 10 G’ 15
15
10
5 2.5 0
3.75
5
Rice
20
7.5
Qualifications & Assumptions From the model one may conclude that free trade is universally beneficial. There are many unrealistic assumptions inherent in the simple model, including: 1. We have assumed that a simple world in which there are only two goods. 2. We have assumed away transportation costs. 3. We have assumed away differences in the prices of resources in different countries. We have said nothing about exchange rate and assumed Cocoa and Rice could be swapped on a one-to-one basis.
• 2) Economic reasons
• In addition to getting the products they need, countries also want to gain economically by trading with each other.
One country might trade with another country in order to support the latter’s government which upholds the same political doctrine.
Evolution of Trade Theory
Theories of International Trade
• 1. Classical Theories of Trade • The trade theory Mercantilism formed the foundation of economic thought from about 15001800. • The theory held that a country’s wealth was measured by its holdings of treasure, usu. in the form of silver and gold. Therefore countries should export more than they import and, if successful, would receive the value of their trade surpluses in the form of gold from the countries that ran deficits.
Resources required to produce 1 Ton of Cocoa and Rice Cocoa Rice
Ghana South Korea 10 13.3 40 20 Production and consumption without trade Ghana 10.0 7.5 South Korea 2.5 5 Total production 12.5 12.5 Production with specialization Ghana 15.0 3.75 South Korea 0.0 10.0 Total production 15.0 13.75
The Theory of Absolute advantage
• by Adam Smiths in The Wealth of Nations • The theory holds that a commodity will be produced in the country where it costs least in terms of resources( capital, land, and labor). • It then follows that each country will benefit from specialization in those commodities in which it has an “absolute advantage,” (ie being able to produce at a lower real cost than another country), exporting them and importing other commodities which it produces at a higher real cost than does another country.
Ghana South Korea
4.0 3.5
1.0 4.0
Cocoa
20
G
C 10 K 5 B 2. 5 0 5 K’ G’ 10 20 A D
Rice
The Theory of Comparative Advantage
by David Ricardo In Principles of Political Economy Ricardo showed that absolute cost advantages are not a necessary condition for two nations to gain from trade with each other. Instead, trade will benefit both nations provided only that their relative costs are different for two or more commodities. In short, trade depends on differences in comparative cost, and one nation can profitably trade with another even though its real costs are higher in every commodity.
Ghana South Korea
Resources required to produce 1 Ton of Cocoa and Rice Cocoa Rice 10 20 40 10 Production and consumption without trade
Ghana South Korea
REASONS FOR INTERNATIONAL TRADE
• 1) Resource reasons
• The uneven distribution of resources around the world is one of the basic reasons why nations began and continue to trade with each other. • (1) Favorable climatic conditions and terrain
Resources required to produce 1 Ton of Cocoa and Rice Country
Ghana
Cocoa
10
Rice
13.33
South Korea 40 20 Ghana is relatively better at producing cocoa than rice, so Ghana is said to have a COMPARATIVE ADVANTAGE in the production of cocoa. South Korea is relatively better at producing rice than cocoa, so England is said to have a comparative advantage in the production of rice.
ຫໍສະໝຸດ Baidu
The Theory of Comparative Advantage
• This theory holds that even if a country is less efficient than another in the production of both commodities , there is still a basis for mutually beneficial trade. • The first country should specialize in the production and export of the commodity in which its absolute disadvantage is smaller and import the commodity in which its absolute disadvantage is greater.
• 5)Innovation or Style (fashion) • Even though a country produces enough
goods, such as cars, at reasonable costs to meet its demands, it may still import cars from other countries for innovation or variety of style. •
Ghana South Korea
Ghana South Korea
Consumption after Ghana Trades 4 tons of Cocoa for 4 tons of South Korea Rice Cocoa Rice 11.0 7.75 4.0 6.0 Increase in consumption as a result of specialization and trade Cocoa Rice 1.0 0.25 1.5 1.0