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    International Economics Script

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    1) Early trade theories included Mercantilism and Classical trade theories like those proposed by Adam Smith and David Ricardo. 2) Mercantilism held that trade was a zero-sum game and that nations should aim for a positive trade balance. It promoted policies like tariffs and subsidies to encourage exports over imports. 3) David Ricardo's theory of comparative advantage argued that nations could both benefit from trade by specializing in and exporting the goods they have a lower relative production cost for, while importing other goods. This maximizes global production efficiency.

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    International Economics Script

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    Lucija
    138 views5 pages
    1) Early trade theories included Mercantilism and Classical trade theories like those proposed by Adam Smith and David Ricardo. 2) Mercantilism held that trade was a zero-sum game and that nations should aim for a positive trade balance. It promoted policies like tariffs and subsidies to encourage exports over imports. 3) David Ricardo's theory of comparative advantage argued that nations could both benefit from trade by specializing in and exporting the goods they have a lower relative production cost for, while importing other goods. This maximizes global production efficiency.

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    1) Early trade theories included Mercantilism and Classical trade theories like those proposed by Adam Smith and David Ricardo. 2) Mercantilism held that trade was a zero-sum game and that nations should aim for a positive trade balance. It promoted policies like tariffs and subsidies to encourage exports over imports. 3) David Ricardo's theory of comparative advantage argued that nations could both benefit from trade by specializing in and exporting the goods they have a lower relative production cost for, while importing other goods. This maximizes global production efficiency.

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    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    138 views5 pages

    International Economics Script

    Uploaded by

    Lucija
    1) Early trade theories included Mercantilism and Classical trade theories like those proposed by Adam Smith and David Ricardo. 2) Mercantilism held that trade was a zero-sum game and that nations should aim for a positive trade balance. It promoted policies like tariffs and subsidies to encourage exports over imports. 3) David Ricardo's theory of comparative advantage argued that nations could both benefit from trade by specializing in and exporting the goods they have a lower relative production cost for, while importing other goods. This maximizes global production efficiency.

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    of 5

    INTERNATIONAL ECONOMICS

    Appleyard, D. R., Field, A. J., Cobb, S. L. .


    International Economics, 8th edition, McGraw Hill
    EARLY TRADE THEORIES -> Mercantilism and Classical Trade
    Theories

    MERCANTLISM
    - 16TH to middle of 18th century

    general idea
    -> positive correlation between economic growth and wealth accumulation

    zero-sum game
    -> one country’s economic gain, the expense of another

    labor theory of value


    -> commodities valued in the terms of their labor content

    2 stages :
    a) BULLIONISM - 17TH century
    -> bullionism -> use&exchange of precious metals
    -> block imports (high tariffs and quotas) & encourage exports (subsidized)
    -> (X>M -> richer country)
    -> emperor wanted for each economic unit (craftsman) to have a positive trade balance
    -> leads to stockpiling of gold/silver
    -> regulation of production
    -> labor control -> crafts guides -> good labor quality, ability to export, country’s wealth
    -> low wages -> low production costs -> country’s products more competitive globally
    -> large families -> more labor force -> subsidies & encouragement of large families
    -> wealth with holdings of precious materials > nation’s product capacity

    b) MATURE STAGE
    -> having a positive trade balance most of the time (trade surplus) -> impossible
    -> new idea -> some economic unit can have a deficit BUT COUNTRY AS A WHOLE HAS TO BE
    IN SURPLUS
    -> import raw materials ex. Iron, iron bars NOT final ex. Carriage -> create value -> export !
    ATTACK OF David Hume -> price-specie1-flow mechanism
    -> continue to accumulate profits, no harm to country’s int. competitive position
    country A :
    -> accumulation of precious metals, X>M - Ms P and W
    -> Ms would then  competitiveness in surplus country
    country B : loss of precious metals, M>M - Ms P and W
    -> Ms competitiviness

    Not possible to attain trade surplus/deficit long-term !


    - movement of speices will bring trade blanace to zero, naturally
    Mechanism that always seeks to equalize value of exports and imports !
    -> ex. The reason behind M>X -> they have imported more raw materials, that will eventually
    become final goods, ready for exporting -> X M

    Explanation -> quantity theory of money

    Ms x V(money velocity) = P(price) x Y(real output level, all Q of goods produced) (TRxGDP)

    - change in one variable, affects the other


    -> elastic in S-Run (P expenditures for the traded goods), L-run (less elastic)
    -> perfect competition (P behavior, W behavior, both flexible to changes)
    -> gold standard -> current prices pegged2 to gold, easily convertible P into gold

    Adam Smith, 1776- critique to Mercantilism :


    -> trade is not a zero-sum game
    -> nation’s wealth reflected in their productive capacity (ability to produce final g&s)
    -> goal : enlarge the production of goods&services rather than acquiring speices (hold gold)
    -> environment in which people have right to pursue own interests -> market economy
     nation’s productivity =  growth =  profits
    ->  division & specialization of labor =  nation’s productivity
    -> still a bit of government intervention provides the best working environment
    – laissez fair -> law&regualiton obedience

    Theory of ABSOLUTE ADVANTAGES


    -> country should specialize in and export those commodities in which they have an absolute
    advantage
    -> produce only those goods that are made with the fewest resources (labor hours)
    compared to others -> production of those goods requires less labor per unit than at their
    trading partners

    1 money in the form of coins rather than notes.


    2 Fixed
    EX. Smith’s Absolute Advantages theory

    CLOTH WINE Price ration in Autarky


    - opportunity costs
    ENGLAND 1 h/yard 4 h/barrel 1𝑤
    4𝑐
    PORTUGAL 2 h/yard 3 h/barrel 1𝑤
    1.5𝑐

    𝟏𝒄 𝟏𝒄
    - 1 barrel of wine, exchanges 4 yards of cloth in ENGLAND 𝟏 = =𝟒𝒄
    𝒘 𝟎.𝟐𝟓𝒘
    𝟒

    -> abs.adv. in production of cloth


    -> less L/h for producing cloth than wine
    -> if they produced wine instead of cloth -> only 1 barrel of wine while opportunity cost is to
    produce 4 units of cloth ! so better to produce cloth instead of wine

    𝟏𝒄 𝟏𝒄
    - 1 barrel of wine, exchanges 1.5 yards of cloth in PORTUGAL 𝟐 = = 𝟏. 𝟓 𝒄
    𝒘 𝟎.𝟔𝟔 𝒘
    𝟑
    -> abs.adv. in production of wine
    -> less L/h for producing wine than cloth

    Benefit for both -> specialize in production in their low-cost commodity and import the
    other that is cheaper to produce abroad
    -> trade is not a zero-sum game -> both can benefit from trade if produce cheaper good at
    home and import more expensive one
    -> absolute advantages -> natural resources (ex. climate)

    For example, the United States may produce 700 million gallons of wine per year, while Italy
    produces 4 billion gallons of wine per year. Italy has an absolute advantage because it
    produces many more gallons of wine – the output – in the same amount of time – the input
    – as the United States.

    -> industry is located where the greatest absolute advantage exists


    -> labor and capital move to the area where productivity and returns are the greatest
    Continue to move until factors are equalized
    Classical trade theories

    David Ricardo, 1817- Theory of COMPARATIVE ADVANTAGES


    -> critique to Smith -> relative not absolute efficiency counts
    -> ONLY produce the good that can be made more efficiently
    -> complete specialization -> maximizes world output !

    Assumptions :
    -> 2 countries, 2 commodities
    -> fixed endowment3 of resources (labor supply is fixed)
    -> fixed but different level of technology among countries
    -> constant production costs (increase of output by 10%, also inputs inc. by 10%)
    so the Labor hours/unit of production don’t change regardless quantity produced
    -> factors of production immobile externally (sectors) – do not move between countries – a
    worker from Croatia cannot go to Germany and work there the same job
    while perfectly mobile internally -> in Croatia from Agrokor marketing to Adris marketing
    -> labor theory of value – input/labor ratio the same in all countries
    -> full employment
    -> perfect competition – no one is strong enough to influence the market
    -> transport costs, trade barriers not included

    3 funding

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