IDSB01 Lec 5: International Trade
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-Exam
o1/3 short answer, multiple choice mainly from readings
o2/3 essays, lectures + readings
-Essays should be handed back sometime this week; Lecture notes and samples (at least 1 with
answers) posted
-No class next week (Thanksgiving)
International Trade
-Key component of international economic interaction
oTrade in goods and services *focus of today*
oCapital flows
Foreign direct investment
oTechnological transfers
oMigration
-Wave of globalization (now)
o2nd in the last few hundred years, but there were earlier waves in middle ages, etc.
1st wave -> late 19th century and ended with WWI
50 years of pause, then in 1970’s (or 80s, depends on how you define it),
wave 2 (the one now)
Brought on by depression 1930s (market crash)
End of wave 2 beginning (maybe) Wall Streets collapsing
Has a lot of elements of what happened in last one
Assume wont happen for now
oGlobalization means (in quantitative sense):
An increase in share of anything a country does is now international
i.e. exports/GDP went up (ship out fraction goes up in relation to total
production)
virtually every country (some exceptions) has seen ratio increase within
recent years
An increase in capital flows internationally
International capital market now very integrated; unfortunately reason
why US crisis spreading to Europe now
Migration has increased somewhat, but not as much as exports and capital flow
Trade
General question: Whether and to what degree is international trade good?
-Most assume trade is good, but depends
-Controversial/political issue
-Ranges from free-traders to high protectionists
oProtection: ways a country can block off trade (esp. imports); trade barriers
Tariffs / taxes
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Usually discriminatory against imports, helps domestic producers in competition against other
countries
Quotas
Ceiling of how many of some kind of import
oFree Traders
Believe that protectionism is a mistake
Free-trade is supposed to benefit everybody
Future of world economy: free-trade would help developing countries the most
Lifestyles between countries would be much more similar, patterns of
consumption, etc.
Convergence of average income levels across all countries
Given time, free trade will decrease differentials between high-low
income countries
Many people against free-trade says its a conspiracy imposed on low-
income countries and might actually widen the gap
oCreation of diversions
Theory of International Trade
-Most aesthetically pleasing of all economic theories
- Internal trade
- Many Canadian economists; international trade more important to us than US
- International trade (trade across borders)
oSpecialization for countries (i.e. one country only makes coconuts, the other makes
grapefruit and trade, more production in total)
Underlying mechanism of all trade; key benefit
Adam Smith father of economics, 1776
Trade that is required to make specialization work pays
Can also explain domestic trade to certain degree
oGenerally say that trade is beneficial to both parties
If one country is better than other country in production of all both goods (i.e.
absolute advantage)
Island 1Island 2
Coconuts/hr of work100 50
Grapefruits / hr of work10 8
Rate of exchange (i.e. grapefruit
per coconut) 10:1 6.33:1
Can still benefit; not a matter of absolute advantage when you’re a trader,
what matters is the rate of exchange in the own country between these
two goods
oIsland 2 person can take 1 grapefruit to other island and can get
10 coconuts and can sell 10 coconuts back in Island 2 for more
grapefruit
2 main ways
Theory of Comparative Advantage
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Document Summary

1/3 short answer, multiple choice mainly from readings. Essays should be handed back sometime this week; lecture notes and samples (at least 1 with answers) posted. Key component of international economic interaction: trade in goods and services *focus of today, capital flows. 2nd in the last few hundred years, but there were earlier waves in middle ages, etc. 1st wave -> late 19th century and ended with wwi. 50 years of pause, then in 1970"s (or 80s, depends on how you define it), wave 2 (the one now) End of wave 2 beginning (maybe) wall street"s collapsing: has a lot of elements of what happened in last one. Assume won"t happen for now: globalization means (in quantitative sense): An increase in share of anything a country does is now international i. e. exports/gdp went up (ship out fraction goes up in relation to total production) virtually every country (some exceptions) has seen ratio increase within recent years.

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