Class Notes (1,034,434)
CA (592,803)
McGill (36,169)
MGCR (718)
MGCR 382 (149)
Lecture 14

MGCR 382 Lecture 14: Trade Theory Part 2Premium

6 pages76 viewsFall 2015

Department
Management Core
Course Code
MGCR 382
Professor
Jan J Jorgensen, David S.Schumacher
Lecture
14

This preview shows pages 1-2. to view the full 6 pages of the document.
MGCR382Lecture14Tradetheorypart2
Continuationoflastweek’slecture
<Wine/radio<⅔
Thepastexamplewassimplified.Werarelyusebartertogetgoods,weusemoney.
Assume:
● Frenchwagerateperhouris12€
● Japanesewagerateperhouris1,000¥–1€isworth125¥
Atwhatexchangeratewouldfranceloseitsadvantageandwhy?
whenisthepriceofthejapanesebottle<3euros?
● 3euros>(1h*1000Y/H)/Eurorate
● Eurorate>333.3Y/H
Whatsthetheoryworth?
Pros:
● Promoteefficiency
● Simple,intuitive,powerful
○ theideacanbeexpandedtoincludemanygoodsorfrictions(tariffsetc…)
● Ithassomeempiricalvalidity
○ RatioofexportvalueratioUS/UKgainstproductivityratioUS/UK
You're Reading a Preview

Unlock to view full version

Subscribers Only

Only half of the first page are available for preview. Some parts have been intentionally blurred.

Subscribers Only
IntheindustrieswheretheUSismoreproductivethantheUK,theUSexportsmorethan
imports.
Isitabsoluteadvantagethatdrivesthetradeorcomparativeadvantage?
● TheUSismoreproductiveeverywhereanditsstilltradingthetheUK,soitsa
comparativeadvantagethatdrivesthetrade.Ifithadanabsoluteadvantage,itwouldn’t
tradewiththeUKatall.
Cons:
● Extremepredictioninspecialization(acountrydoesn’tjustproduceonetypeofgoods).
● thereisaproductdifferentiationintherealworld(afrenchbottleofwineisn’tthesame
asajapanesebottleofwine)
● Excludemanydifferentfactors(eg:politics)
● ignoresmanyaspectsofreality
○ silentontheeffectoftradeonincomedistributionwithincountries.
● Silentonhowyouactuallygetacomparativeadvantage
Tradepatternsandchallenges
Whotradeswithwhom?
● Closeneighbourtrademorethanlongdistanceneighbours(duetotransportationcosts)
● Thesizeofthetwoeconomies(biggerisbetter).
Thisiscalledthe“gravitymodeloftrade”(whentwothingsarebigger,theyattracteachother
morejustlikethephysicallaws).
You're Reading a Preview

Unlock to view full version

Subscribers Only

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.