Slide 2:
Reasons for international trade Differences in factor endowments Saudi has oil while Japan has none Costa Rica has the climate to grow bananas whereas the UK cannot The USA has a large stock of skilled workers when Sudan’s is comparatively unskilled etc These differences lead to trade Price Some can produce cheaper May be due to natural resources or skills or quality of physical capital Gains made from specialisation Product differentiation International trade allow much wider choice The same basic goods can differ in a wide variety of ways e.g. specifications Political reasons Countries sign trade deals with each other Countries may place embargoes
Slide 3:
Economists theories for international trade Absolute Advantage Comparative Advantage See gardening parable first http://www.youtube.com/watch?v=RpfV0Oerfr8 Then see mjmfoodie slides http://www.youtube.com/user/mjmfoodie#p/u/67/38hvvAzgXZY (all on Facebook classroom)
Slide 4:
The assumptions of the theory of comparative advantage The simple theory makes a number of important assumptions (use these for evaluation) No transport costs Costs are constant and there are no economies of scale Only two economies produce two goods Traded goods are homogeneous Factors of production are assumed to be perfectly mobile There are no tariffs or other trade barriers There is perfect knowledge
Slide 5:
The terms of trade Trade will only be mutually advantageous if the terms of trade are somewhere between the two lines, the area shaded on the graph Terms of trade : the ratio of export prices to import prices
Slide 6:
Why comparative advantage exists Ricardo believed that all costs ultimately could be reduced to labour costs (labour theory of value) Therefore differences in comparative costs reflected differences in the productivity of labour Theory suggests that high labour productivity countries would have a comparative advantage in the production of sophisticated high technology goods Current pattern of world trade backs this Neoclassical theory suggests that labour is not the only source of differing costs Capital and land endowments may differ
Slide 7:
Non price theories of trade The theory of comparative advantage provides a good explanation of world trade in commodities It also provides a good explanation of trade between 1 st and 3 rd world countries But what about trade between developed countries? Preference similarity theory suggests that many manufactured goods are imported because consumers want greater choice More choice
Main points:
Main points
Slide 9:
Assessment of Section Complete the following questions – bullet point longer answers