国际经济学第二章
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International Economics Professor Xu Song & Economics
2.2b Different Views on National Wealth
Mercantilists measured the wealth by the stock of precious metals. But today we measure a nation’s wealth by the total stock of human resources, man-made and natural resources available for producing goods and services. The greater this stock of useful resources, the greater is the flow of goods and services to satisfy human wants and the higher the standard of living in the nation.
Can we use the theory to carry out foreign trade?
It can not even explain the trade between advanced countries because their productivities are almost the same.
U.S. has greater efficiency in production of wheat (absolute advantage) and it should specialize in the production of wheat and exchange for cloth , while U.K. has greater efficiency in production of cloth (absolute advantage) and it should specialize in the production of cloth and exchange for wheat (absolute disadvantage). What happens if U.S. exchanges 6W for 6C with U.K.?
International Economics Professor Xu Song Anhui University of Finance & Economics
2.3f Comments on the Absolute Advantage
It can only explain small part of world trade today, it can not explain most of the trade between the developed and the developing countries.
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.3 Adam Smith’s Trade Theory
The basis for trade ----------- Absolute advantage -----------The Wealth of Nations His famous book If one nation is more efficient than another nation in the production of one commodity, the nation has absolute advantage in that commodity.
Chapter 2 The Law of Comparative Advantage
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.1 Introduction
In this chapter, we will examine the development of trade theory from the 17th century to the first half of the 20th century. This historical approach is useful not because we are interested in the history of economic thoughts but because it is a convenient way of introducing the concepts and theories of international trade from the simple to the most complex and realistic. We will use 2X2X1 model and start from absolute advantage, to comparative advantage and to opportunity costs and production possibility frontiers.
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.2c Purposes of Mercantilists’ Trade Theory
To maintain larger and better armies with more gold and silver and consolidate their power at home and acquire more colonies; To do more business with more gold in circulation; To stimulate national output, develop national economy and increase employment.
International Economics Professor Xu Song Anhui University of Finance & Economics
2.3d Difference Between Mercantilists & Adam Smith
According to mercantilists’ view, one nation could only gain at the expense of another nation and each government should take strict control of all economic activities and trade. They should adopt protectionist measures to stimulate exports and restrict imports. Some of the views are still alive and even thriving today in a sort of neo-mecantilism. But according to Adam Smith, all nations could gain from free trade and each nation should adopt a laissez-faire policy (free trade policy).
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.3e Illustration of Absolute Advantage
U.S. 6 4 U.K. 1 5
Wheat(bushels/man-hour) Cloth(yards/man-hour)
International Economics Professor Xu Song Anhui University of Finance & Economics
2.3b Where Do the Gains Come From?
The pattern of trade ------- both nations can gain by each specializing in the production of the commodity of its absolute advantage and exporting part of its output with the other nation for the commodity of its absolute disadvantage. Policy: Free trade policy should be adopted to make better use of resources and maximize world welfare. By specialization, resources are utilized in the most efficient way and the output of both commodities will rise. The increased output measures the gains from specialization in production available to be divided between the two nations through trade.
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.2 Mercantilists’ Views on Trade
Mercantilism ---- Some people wrote articles on international trade. Their philosophy was known as mercantilism. Representative ----- Thomas Munn (1571-1641) Works ---- England’s Treasure by Foreign Trade Wealth: The way for a nation to become rich and powerful was to export more than it imported. The resulting surplus would then be settled by an inflow of bullion. The more gold and silver a nation had, the richer and more powerful it was. What kind of policy should be adopted? The government had to do all in its power to stimulate the nation’s exports and discourage and restrict imports. What is the nature of the trade? One nation could gain only at the expense of other nations. It is called a zero-sum game.
2.2b Different Views on National Wealth
Mercantilists measured the wealth by the stock of precious metals. But today we measure a nation’s wealth by the total stock of human resources, man-made and natural resources available for producing goods and services. The greater this stock of useful resources, the greater is the flow of goods and services to satisfy human wants and the higher the standard of living in the nation.
Can we use the theory to carry out foreign trade?
It can not even explain the trade between advanced countries because their productivities are almost the same.
U.S. has greater efficiency in production of wheat (absolute advantage) and it should specialize in the production of wheat and exchange for cloth , while U.K. has greater efficiency in production of cloth (absolute advantage) and it should specialize in the production of cloth and exchange for wheat (absolute disadvantage). What happens if U.S. exchanges 6W for 6C with U.K.?
International Economics Professor Xu Song Anhui University of Finance & Economics
2.3f Comments on the Absolute Advantage
It can only explain small part of world trade today, it can not explain most of the trade between the developed and the developing countries.
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.3 Adam Smith’s Trade Theory
The basis for trade ----------- Absolute advantage -----------The Wealth of Nations His famous book If one nation is more efficient than another nation in the production of one commodity, the nation has absolute advantage in that commodity.
Chapter 2 The Law of Comparative Advantage
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.1 Introduction
In this chapter, we will examine the development of trade theory from the 17th century to the first half of the 20th century. This historical approach is useful not because we are interested in the history of economic thoughts but because it is a convenient way of introducing the concepts and theories of international trade from the simple to the most complex and realistic. We will use 2X2X1 model and start from absolute advantage, to comparative advantage and to opportunity costs and production possibility frontiers.
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.2c Purposes of Mercantilists’ Trade Theory
To maintain larger and better armies with more gold and silver and consolidate their power at home and acquire more colonies; To do more business with more gold in circulation; To stimulate national output, develop national economy and increase employment.
International Economics Professor Xu Song Anhui University of Finance & Economics
2.3d Difference Between Mercantilists & Adam Smith
According to mercantilists’ view, one nation could only gain at the expense of another nation and each government should take strict control of all economic activities and trade. They should adopt protectionist measures to stimulate exports and restrict imports. Some of the views are still alive and even thriving today in a sort of neo-mecantilism. But according to Adam Smith, all nations could gain from free trade and each nation should adopt a laissez-faire policy (free trade policy).
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.3e Illustration of Absolute Advantage
U.S. 6 4 U.K. 1 5
Wheat(bushels/man-hour) Cloth(yards/man-hour)
International Economics Professor Xu Song Anhui University of Finance & Economics
2.3b Where Do the Gains Come From?
The pattern of trade ------- both nations can gain by each specializing in the production of the commodity of its absolute advantage and exporting part of its output with the other nation for the commodity of its absolute disadvantage. Policy: Free trade policy should be adopted to make better use of resources and maximize world welfare. By specialization, resources are utilized in the most efficient way and the output of both commodities will rise. The increased output measures the gains from specialization in production available to be divided between the two nations through trade.
International Economics
Professor Xu Song
Anhui University of Finance & Economics
2.2 Mercantilists’ Views on Trade
Mercantilism ---- Some people wrote articles on international trade. Their philosophy was known as mercantilism. Representative ----- Thomas Munn (1571-1641) Works ---- England’s Treasure by Foreign Trade Wealth: The way for a nation to become rich and powerful was to export more than it imported. The resulting surplus would then be settled by an inflow of bullion. The more gold and silver a nation had, the richer and more powerful it was. What kind of policy should be adopted? The government had to do all in its power to stimulate the nation’s exports and discourage and restrict imports. What is the nature of the trade? One nation could gain only at the expense of other nations. It is called a zero-sum game.