INTB 2200 Lecture Notes - Lecture 3: Canadian Dollar, Absolute Advantage, International Trade
27 Jul 2018
School
Department
Course
Professor
World of International Trade
International trade is good for producers/businesses because it increases demand→possibility of
charging high prices and increase profits
International trade is good for customers because → increases variety, competition, hopefully
quality and lowers price at the same time
International trade also increases risks: currency exchange rate risk, increased cost, reduces
dependence on domestic market but increases dependence on international economic cycle
Macroeconomically issues:
- People lose jobs
- Loss or reorganization of industries
Traditional theorems of international trade (for homogeneous products)
1) Trade improves the welfare of factors most used
2) Trade is biased in favour of the factors found in most abundance
3) Producers in export sector see their welfare improve more than producer in import sector
4) Customers in import sector will see their welfare improve in comparison to customers in
export sector
5) In the long run there is an equalization of the factors of trade (e.g. labour cost in China is
increasing and eventually will be equal to the labour cost in Canada)
New theorems of international trade
1) Traditional theorems were for homogeneous products today we have branding and
differentiation
2) Today we have clustering
3) Today the focus is on world class design and world class supply chain… also the
importance of money has gone down in a way that importance of long term relationship
have increased
Is international free trade a good thing
- David Ricardo’s theory of absolute and comparative advantage suggests yes and most
economists believe it to be true
Let us assume a simple world with only two countries A and B, and say there are only two jobs
cooking and cleaning.
There is no money and we will assume that any reduction in time spent working per day =
improvement in quality of life.
Time for cooking
per day
Time for cleaning
per day
Total
No trade
Country A citizen
5 hr/day
10 hr/day
15
Country B citizen
10
5
15
Document Summary
International trade is good for producers/businesses because it increases demand possibility of charging high prices and increase profits. International trade is good for customers because increases variety, competition, hopefully quality and lowers price at the same time. International trade also increases risks: currency exchange rate risk, increased cost, reduces dependence on domestic market but increases dependence on international economic cycle. David ricardo"s theory of absolute and comparative advantage suggests yes and most economists believe it to be true. Let us assume a simple world with only two countries a and b, and say there are only two jobs cooking and cleaning. There is no money and we will assume that any reduction in time spent working per day = improvement in quality of life. Which country has absolute advantage is cleaning: b (b/c a spent the least time on cleaning)
