P.37. The gains of international trade. p.557.
The theory of comparative advantage. David Ricardo
(1772-1823).
Basic reason for trade is the diversity of
conditions between countries.
The trade depends upon comparative advantage, not upon
absolute advantage (people produce things which they are relatively best at,
not things they can do most).
A model of comparative advantage.
Look at the notes done in lesson (2 lands,
2 goods, different production possibilities)
Domestic trading ratio(DTR)- 10units of food=4units of
clothing.
International trade is always beneficial whenever there is
a difference in the opportunity cost ratios between 2 countries.
An international trading ratio- somewhere between DTR-s of
different countries. Depends upon the forces of supply and demand in the
international markets.
If the international trade is started, in
the short-run people in industries that have not the comparative advantage will
go to bankruptcy.
Exchange-too high leads to trade deficit(M>X), too low
harms domestic.
Multilateral trade- several countries
involved.
Specialisation is never complete.
Factor price equalisation-international
trade tends to equalise factor prices (wage and land) without changing them,
but changing the products. They will never be completely equal because of the
customs and transportation costs. Also apply if people have different tastes,
then the product prices would be more equal after IT.
Limitations of comparative advantage:
1. Obstacles to trade.
tariffs and quotas
political frontiers and
language
currencies
disguised barriers
(safety requirements and too complex rules)
trade diversion
(distortion of different patterns)
2. Transport costs
3. Factor immobility (prices don't rise easily)
4. Increasing costs(diseconomies of scale)
5. Over-specialisation and dependency.
Protectionism considered:
UK is least protective to its home market
(no tariffs), but EC is for non-EC countries.
1. Cheap labour
2. Dumping-selling
on foreign market below production price.
3. Infant
industries in homeland (if just established)
4. Fear of
unemployment and immobile factors
5. Balance of
payments
6. Strategic
reasons for being independent
7. Bargaining for
better tariffs and more profits
8. Revenue the
government gets from duties.
