International Trade Chapter 2

Primary Commodities

- This theory might be true for couple of reasons -First, Technological progress in manufactured goods can certainly lead to a fall in the price of these good as they become easier to produce - This is a fall in terms of trade for industrialized countries rather than developing countries - Second, at least for oil, the cartel restricting prices has caused an increase in the terms of trade for oil-exporting countries

Labor Productivity and Wages

- can be measured by the value added per hour manufacturing -value added is the difference between sales revenue in an industry and the costs of intermediate inputs -Equals the payments to labor and capital in an industry -The Ricardian model ignores capital so we can measure labor productivity as value added divide by the number of hours worked or value added per hour. - countries with higher labor productivity pay higher wages, just as the Ricardian model predicts

Proximity

- closer the countries are the lower the costs of transportation -ex: the largest trading partner of most European countries is another European country -often leas to countries joining into a free trade area.

More of trade for Primary commodities

- there are some commodities that follow the pattern predicted by prebisch and singer, with falling prices relative to manufacturing -however this is not general rule the other primary commodities have had increasing or non consistent change in their prices

The Terms of Trade For Primary Commodities

-Latin American economist Raul Prebisch and British economist Hans Singer each put forward the hypothesis that the price of primary commodities would decline over time relative to the price of manufactured goods. -Primary commodities are often exported by developing countries ,so their terms of trade would decline over time.

Resources

-are also called factors of production - the land,labor,and capital used to produced goods and services. -Some countries produce unfinished products that are processed in another country. -Trade a unfinished good is ex: of outsourcing

Comparative Advantage (David Ricardo)

-is the primary explanation for trade among countries -A country has comparative advantage in producing those goods that it produces best compared with how well it produces other goods.

Solving for international prices

-the price of a country's exports divided by the price of its imports. -For home, Pw/Pc is their terms of trade -An increase in Pw or a fall in Pc will raise Homes terms of trade -An increase in the terms of trade is good for a country it makes it better off -A country will earn mess ore for its exports -a country will pay less for its exports - For Foreign, Pc/Pw is the terms of trade and higher relative price for cloth makes it better off.

Comparative Advantage Definition

A country has comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country.

Production Possibilities frontier

A curve illustrating all the attainable combinations of two products that may be produced with available resources

Absolute Advantage and Labor Productivity

A high unit of labor requirement means low labor productivity.

Dynamic gains from trade

Gains from trade overtime that occur bc trade causes an increase in a country's economic growth or induces greater efficiency in the use of existing resources.

Static Gains from trade

Gains in word output that result from specialization

Comparative Advantage

The ability of a country to produce a good a lower opportunity cost than another country.

Absolute Advantage

The ability of a country to produce a good using fewer resources than another country.

Labor theory of Value

The costly of a good is determined solely by the amount of labor used to produce it.

Opportunity Cost

The highest-valued alternative that must given up in order to engage in activity opportunity.

Note

The only case in which neither country has a comparative advantage is when the opportunity costs are equal in both countries

Mercantilism

The theory that a country should discourage imports and encourage exports in order to increase its wealth .

Absolute Advantage (Adam Smith)

When a country has the best technology for producing a good, it has an absolute advantage in the production of that good -is not actually not a good explanation for trade patterns

Trade Based on Comparative Advantage

Why would trade occur is one country had an absolute advantage in both goods?

Opportunity cost difference

the difference between the opportunity cost of producing the product domestically versus the cost of purchasing the product from another country receives from trade.

Scarcity

unlimited wants exceed the limited resources available to fulfill those wants