February 6, 2013
Lecture # 12
Why Trade takes place.
-Comparative Advantage( Kevin Smith, Ricardo- developed logic)
Definition: “ An actors ability to produce a good or service more efficiently
than another actors ability to do so”
ex: Middle pins to demonstrate how efficiency was used. stages of
production. Individuals attempting to do all the stages on their own,
when they should divide the tasks.
The consequence: specialization.
Ex simplest: two countries, producing two goods.
1)In Isolation, Country A can:
Produce a maximum of either
-Industrial output(textiles): 300 units
-Agricultural output(wine): 150 units
The price of goods prior to trade:
300/150 or 2/1 ( 2 units of textiles= 1 unit of wine)
2)In Isolation, Country B can:
Produce a maximum of either:
-Industrial output( textiles): 80 units
-Agricultural output (Textiles): 240 units
The Price of goods prior to trade:
240/80 or 1/3 ( 1 unit of textiles= 3 units of wine)
Domestic prices in the two countries, differ, therefore this is what drives trade.
Compare the Domestic Prices:
In Country A: 1 unit of wine costs 2 units of textiles.
In Country B: 1 unit of wine costs 1/3 a unit of textiles.
If they can, A should trade textiles for B’s wine.
if each specializes, the total production possible is:
300 units of textiles
240 units of wine
Note, this is the highest possible consumption. -UsingComparativeAdvantage
The Heckscher-Ohlin( H-O) model
-Based on the endowments of the factors of production
-Factors are inputs used to make goods ( such as capital and labor) Look at
Ratio capital to labor
-The H-O model helps explain trade patterns.
-Explaining intra-good trade
( industrial countries trading with each other, other factors that ar