MGCR 382 Lecture Notes - Lecture 2: Comparative Advantage

• School: McGill University
• Department: Management Core
• Course: MGCR 382
• Professor: Robert David

Document Summary

Mgcr 382: international business - lecture 2: trade theory. Pros of comparative advantage: simple, intuitive, powerful, has an empirical validity to back up claims, basic ideas can be expanded to include many goods, frictions (eg. tariffs, transport costs etc) Cons for comparative advantage: predicts unrealistically extreme specialization ignores many aspects of reality. Example: doesn"t incorporate the income distribution within countries: silent on how you actually get a comparative advantage. The thickness of the arrow is directly proportional to the volume traded between countries: represents proximity geographical distance (close or far away, size of the country/economy bigger the economies more the trade. This is called the gravity model of trade . The force is proportional to the size of the economies and inversely proportional to the distance. Heckscher and olin: factor endowments : countries differ in the amount of available resources present within themselves, different products need different resources.