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3 views8 pages

international lecture 3

Uploaded by

Amgad Elshamy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTERNATIONAL TRADE

Dr. Nahla Azzam


Lecturer of economics
Faculty of Economic Studies
and Political Science (ESPS)
Alexandria University

Email:
nahla.azzam@alexu.edu.eg

Lecture (3)
15/10/2023
2023/2024
Part 1: International Trade Theory
Chapter (2)
The Law of Comparative Advantage
4. Trade Based on Comparative Advantage: David Ricardo:

• The Law of Comparative Advantage:

“Even if one nation is less efficient than (has absolute disadvantage with
respect to) the other nation in production of both commodities, there is still a
basis for mutually beneficial trade”.

• The first nation should specialize in the production of and export the
commodity in which its absolute disadvantage is smaller ( this is the
commodity of its comparative advantage) and import the commodity in
which its absolute advantage is greater (this is the commodity of its
comparative disadvantage).
Illustration of Comparative advantage:
U.S. U.K. Productivity of U.K. to U.S.

Wheat (bushels/labor hour) 6 1 1/6 = 16.6 %


Cloth (yards/labor hour) 4 2 2/4 = 50 %

• U.K. now has as absolute disadvantage in the production of both wheat and
cloth with respect to the united states.
• However, since U.K. labor is half as productive in cloth , but 6 times less
productive in wheat with respect to the U.S. i.e., its absolute disadvantage is
lower in cloth than in wheat.
⸫ Then the U.K. has a comparative advantage in cloth.
• Although, U.S. has an absolute advantage in both commodities, its absolute
advantage is greater in wheat (6:1) than in cloth (4:2).
⸫ Then the U.S. has a comparative advantage in wheat.
• According to the law of comparative advantage, both nations can gain if:
➢ U.S. specializes in the production of wheat and exports some of it in
exchange for British cloth.
➢ U.K. specialize in the production of cloth and exports some of it in
exchange for American wheat.

Gains from trade:


• U.S. is indifferent to trade if it received only 4C from U.K. in exchange for
6W, since it can produce 4C per one labor hour1 domestically.
• Also, U.S. would refuse to trade if it received anything less than 4C for the
6W (it is not beneficial ).
• U.K. is indifferent to trade if it received only 1W from U.K. in exchange
for 2C, since it can produce 1W per one labor hour domestically.
• Also, U.K. would refuse to trade if it received anything less than 1W for
the 2C (it is not beneficial).
• In order for both nations to realize gains from trade, then the exchange rate
must be different from the internal rate in both countries.

❑ Suppose that U.S. exchanges 6W for 6C, then:


• The U.S. would gain 2C ( or save ½ hour of labor time used in cloth), since
U.S. can only exchange 6W for 4C domestically.
• For U.K., the 6W received from U.S. would require 6 labor hours to be
produces domestically. U.K. could instead use these 6 hours to produce
12C, give up only 6C for 6W from U.S., and gain 6C or save 3 labor hours.
❑ To sum up:
✓ The U.S. gains if it exchange 6W for more than 4C from the U.K.
✓ The U.K. gains if it exchange 6W for less than 12C from the U.S.
✓ Then the range for mutually beneficial trade is:
4C < 6W < 12C
✓ Total gain from trade available to be shared by the two nations trading 6W,
is represented by the difference between 4C and 12C (8C).
Total gain = U.S gain (2C) + U.K. gain (6C) = 8C

✓ The closer the rate of exchange is to the domestic rate in U.S. (6W:4C), the
smaller is its share in total gains, and the larger is the share of U.K. in total
gains, and vise versa.

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