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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


               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.

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