International Trade

17,885 views

Published on

A2 macro presentation on some of the gains from trade, basics of international trade theory

Published in: Business, Technology
0 Comments
8 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
17,885
On SlideShare
0
From Embeds
0
Number of Embeds
6,127
Actions
Shares
0
Downloads
700
Comments
0
Likes
8
Embeds 0
No embeds

No notes for slide

International Trade

  1. 1. The Economics of International Trade tutor2u A2 Economics Geoff Riley, 2013
  2. 2. Paul Krugman on Trade • “If there were an Economist’s Creed, it would surely contain the affirmations “I believe in the Principle of Comparative Advantage” and “I believe in Free Trade”.” • Paul Krugman, Professor of Economics at MIT, Cambridge
  3. 3. Hidalgo and Economic Complexity Ask yourself the question: If a good cannot be produced in Japan or Germany, where else can it be made?
  4. 4. Global Regions
  5. 5. What is Free Trade? • Trade free from artificial barriers • Trade reflects the impact of specialisation and exchange – Specialization: specialisation of scarce resources – Exchange: in part based on comparative advantage in supplying different goods and services
  6. 6. The concept of an open economy • In an open economy, one nation trades openly with other – Trade in goods – Trade in services – Free flow of financial capital – Free flow of labour resources • An economy integrated with and connected to the world economy
  7. 7. World Trade Time period 1950-60 Volume of world trade 7.7 Real GDP (world) 4.5 1960-70 8.6 5.5 1970-80 5.3 4.1 1980-90 3.9 3.2 1990-00 6.5 2.3 2000-11 4.7 2.7 2001 -0.2 2.0 2002 3.4 2.3 2003 5.7 2.9 2004 9.7 4.0 2005 6.5 3.5 2006 8.6 4.0 2007 6.5 3.9 2008 2.3 1.3 2009 -12.1 -2.4 2010 14.0 3.8 2011 4.9 2.4 Volume of world merchandise exports and gross domestic product, 1950-2011, annual % change
  8. 8. Exports of Goods and Services
  9. 9. Exports of Goods and Services
  10. 10. Potential Advantages from Trade • (1) Increased competition for producers – Increased market contestability – Pressure on suppliers to keep prices down – Improved allocative & productive efficiency • Prices closer to their factor cost • Pressure on unit costs to fall / scale economies • (2) Better use of scarce resources – Exploitation of comparative advantage – Benefits from specialisation – Trade can be an important source of economic growth and development
  11. 11. Potential Advantages from Trade • (3) Dynamic Efficiency Gains – Trade speeds up the pace of technological progress and innovation – Transfer of ideas / technology spill-overs – World Bank – “dynamic globalisers have achieved the fastest growth over the last twenty years” – Greater choice for consumers
  12. 12. Potential Advantages of Trade • (4) Economies of scale – Increasing returns to scale from selling to larger markets e.g. BRICs or the EU single market – Falling LRAC / lower real prices – Gains in producer & consumer surplus • (5) A stimulant to growth / recovery – Exports – an injection of AD into circular flow – Boost to exports will have multiplier and accelerator effects on national income – Supply-side improvements from investment and greater factor mobility between countries
  13. 13. Export Potential to BRICs & Beyond Jim O’Neill “By the end of the decade, Britain’s trade with the BRIC countries of Brazil, Russia, India and China, will account for 17pc of total exports.”
  14. 14. Gains from External Trade Reduction in extreme poverty Increased market competition Access to new technologies Inflows of knowledge Economies of scale Better use of scarce resources
  15. 15. Comparative Advantage • David Ricardo, one of the founding fathers of classical economics • Comparative advantage exists when – Relative opportunity cost of production is lower than in another country – A country is relatively more productively efficient than another • Basic rule – specialise in the things that you are relatively best at • This opens up important gains from trade
  16. 16. Factor endowment model • Developed by Heckscher and Ohlin • Countries with a relative factor abundance can specialise and trade – Abundance of skilled labour → specialisation → export → exchange for goods and services produced by countries with abundance of unskilled labour – Exports embody the abundant factor – Imports embody the scarce factor – Assumes a high degree of factor mobility
  17. 17. The Theory of Comparative Advantage Analysis of the potential gains from specialisation, trade and exchange between regions and nations
  18. 18. Theory of Comparative Advantage Half of each country’s available resources are allocated to each industry Freezers (000s per year) Dishwashers (000s per year) Germany 1000 500 Italy 800 200 Total Output
  19. 19. Theory of Comparative Advantage Half of each country’s available resources are allocated to each industry Freezers (000s per year) Dishwashers (000s per year) Germany 1000 500 Italy 800 200 Total Output 1800 700
  20. 20. Assuming Constant Returns – The Effects of Partial Specialisation Gain in total output after specialisation Freezers (000s per year) Dishwashers (000s per year) Germany 400 (-600) 800 (+300) Italy 800 200 Total Output
  21. 21. Assuming Constant Returns – The Effects of Partial Specialisation Gain in total output after specialisation Freezers (000s per year) Dishwashers (000s per year) Germany 400 (-600) 800 (+300) Italy 1600 (+800) 0 (-200) Total Output
  22. 22. Assuming Constant Returns – The Effects of Partial Specialisation Gain in total output after specialisation Freezers (000s per year) Dishwashers (000s per year) Germany 400 (-600) 800 (+300) Italy 1600 (+800) 0 (-200) Total Output 2000 (+200) 800 (+100)
  23. 23. Assuming Constant Returns – The Effects of Partial Specialisation Gain in total output after specialisation Freezers (000s per year) Dishwashers (000s per year) Germany 400 (-600) 800 (+300) Italy 1600 (+800) 0 (-200) Total Output 2000 (+200) 800 (+100)
  24. 24. Beneficial Terms of Trade • A beneficial terms of trade is an agreed rate of exchange of one product for another than leaves both countries better off from trade • Consider the domestic terms of trade for each country – Without trade, Germany gets 2 extra freezers for every dishwasher that is gives up – Without trade, Italy has to give up 4 freezers for every extra dishwasher it produces • Is there a mutually beneficial terms of trade?
  25. 25. Trade increases amount available in each country Final output in after trade Freezers (000s per year) Dishwashers (000s per year) Germany 1150 (+750 .. import) 550 (-250 ..export) Italy 850 (-750 .. export) 250 (+250 .. import) Total Output 2000 At start: (1800) 800 At start: (700)
  26. 26. Assumptions underlying theory Constant returns to scale Mobility of factor inputs No externalities Trade finance available Barriers to trade are small
  27. 27. Assumptions underlying theory Constant returns to scale Mobility of factor inputs No externalities Trade finance available Barriers to trade are small Krugman – New Trade Theory “In reality, world trade is dominated by rich countries trading similar goods with each other”
  28. 28. Assumptions underlying theory Constant returns to scale Mobility of factor inputs No externalities Trade finance available Barriers to trade are small Krugman – New Trade Theory “In reality, world trade is dominated by rich countries trading similar goods with each other” Standard theory ignores extra benefits from (i) Consumer choice (ii) Economies of scale (iii) Positive trade externalities (iv) Other dynamic effects of trade
  29. 29. Supply and Demand Analysis Price Output (Q) Domestic Demand Domestic Supply World Price
  30. 30. Supply and Demand Analysis Price Output (Q) Domestic Demand Domestic Supply P1 Q1 World Price QdQs Pw
  31. 31. Comparative Advantage Unit labour costs Exchange rate Innovation Economies of scale Sustainability Human capital
  32. 32. The Importance of Human Capital = More Value Added from Exports Technology spill-overs Universities Science Parks Precision Engineering Capital Projects Creative Industries
  33. 33. Economic complexity and trade Two countries that have high levels of economic complexity, but still low levels of per capita income are China and Thailand Ask yourself the question, if you cannot produce it in China or Thailand, where else can you produce it?
  34. 34. Export Patterns: Rwanda
  35. 35. Export Patterns: Malawi
  36. 36. Export Patterns: United Kingdom
  37. 37. Shifts in Advantage for the UK • Long term decline in comparative advantage in many areas of manufacturing industry – Lower cost producers in SE Asia and E.Europe – Productivity gap with other leading economies – Strong ex. rate has damaged competitiveness • The UK still has trade surpluses in chemicals and high knowledge manufacturing • Main comparative advantage lies with business and financial services

×