ECON 102 Lecture Notes - Human Capital, Arbitrage, Comparative Advantage

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Published on 17 Apr 2013
School
UBC
Department
Economics
Course
ECON 102
Professor
Page:
of 10
International Trade 03-27-2013
Case for International Trade importance: Rate at which people trade stuff
has exponentially increased more than the rate at which people produce
stuff
Gains from International Trade
Without trade, people must be self-sufficient
With trade, people can specialize in production and acquire other
goods through trading
This is true for individuals, firms and countries
The remarkable thing is specialization and trade increases production
(and consumption) possibilities overall
So called Gains from Trade
Absolute Advantage
One country has an absolute advantage in the production of a specific
product if, relative to another country, it can produce one unit of the product
using fewer resources.
Canada has absolute advantage over EU in terms of wheat and
cloth
Comparative Advantage
One country has a comparative advantage in the production of a specific
product if, relative to another country, its OC for producing the product is
lower.
Canada has comparative advantage with respect to wheat
EU has comparative advantage with respect to cloth
Specialization
World production of both goods can be increased if each country specializes
in producing the goods for which it has a comparative advantage.
Get table from slides
By Canada and the EU shifting their resources to the thing you’re
good at, you maximize the total production of that product and you
can use it in trade.
Advantages of trade:
Opportunity to specialize
Increase in total quantity of goods and services available
Sources of Comparative Advantage
Factor endowments
o Ex. Canada has a lot of raw materials minerals, oil, lumber,
precious metals has C.A.
Climate
Human capital
o Ex. Canada has very little people comparative disadvantage
o Prediction: you’ll see Canada without a very large
manufacturing sector (not labour intensive) but involved in
resource extraction
Note: Comparative advantage is a dynamic concept and can change over
time.
Patterns of Trade
The Law of One Price: when an easily transported product is
internationally traded, arbitrage will guarantee a single world price
o The price should be the same in two different regions of the
world if it is easily transportable
Comparing the world price to the autarkic price (domestic price)
o Pw > Pd Canada will export the product
o Pw < Pd Canada will import the product
“Autarky” – self sufficient in the sense that all goods and services
consumed by Canadians are produced by Canadians; closed to
international trade
Exports
Canadian market for certain commodity
Without international trade, price will be determined by Pd and Qd
Sellers of this product can now receive Pw (higher)
Now producers will supply at Qw
Export: difference Q and Qw because Canadian producers supplying
more than Canadian customers want at Pw
Example: Oil
Canadian producer of oil trying to max profits
If you can sell oil for a higher price, why wouldn’t you do it?
Sell it at world price Pw to the rest of the world.
Now have to charge Canadian customers the higher price (no
protection for Canadian customer in this sense)
Advantage: comes from logic of circular flow diagram
o Income generated in production process will make its way to
Canadian households
Imports
Canada is not very good at producing a certain good or service
World price is below domestic price
Import: difference Q and Qw because Canadian producers are not
willing to produce at a lower Pw

Document Summary

Case for international trade importance: rate at which people trade stuff has exponentially increased more than the rate at which people produce stuff. With trade, people can specialize in production and acquire other goods through trading. This is true for individuals, firms and countries. The remarkable thing is specialization and trade increases production (and consumption) possibilities overall. One country has an absolute advantage in the production of a specific product if, relative to another country, it can produce one unit of the product using fewer resources. Canada has absolute advantage over eu in terms of wheat and cloth. One country has a comparative advantage in the production of a specific product if, relative to another country, its oc for producing the product is lower. Canada has comparative advantage with respect to wheat. Eu has comparative advantage with respect to cloth.