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IDSB01 - Lecture 5

International Development Studies
Course Code
Liang Chen

of 5
IDSB01 Lec 5: International Trade
Admin Stuff
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
-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
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
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
Usually discriminatory against imports, helps domestic producers in competition against other
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
2 main ways
Theory of Comparative Advantage
Comparative advantage is all you need: to be more efficient in comparison
Only time it won’t work if the rate of exchange is the same before trade 
nobody would benefit
Counter-intuitive; often fearful of inability to compete if you’re sucking at
But as long as you’re more efficient in SOMETHING within your own
country, you can still sweep all the markets
oYou have to have a lower relative cost whereas somebody has to
have a higher relative cost in something
Inefficiency in everything low standard of living
-When is trade not beneficial/damaging? (conditions)
oImmoral trade
Asymmetric information, cheating causes damage when used in trade
Island 1 sells faulty coconuts, grapefruit island paid for bad coconuts with
grapefruits, might as well produced coconuts themselves
oInvoluntary trade between stronger and weaker party, the weaker one loses
Usage of power in trade; colonial masters vs. colony
Boston tea part
- In each country (when both countries are benefitting), would benefits be shared equally by
everybody in the countries?
oGeneral pattern of trade: industrial countries sell finished goods and buy raw materials
from developing countries
oFactors of production in connection with exports benefit
i.e. if you make coconuts in a grapefruit exporting country, you lose
oPrice of natural resource tends to be lower than finished goods, why?
Natural resources tend to be in 3rd world countries
Degree of competition in manufacturing
Coffee beans: monopsony (few buyers, lots of sellers)
Raw coffee beans are cheap due to this competition
oType of country that benefits
Coconut producer (cost advantages)
oDeveloping countries that have become major manufacturing countries
Taiwan, East-Asian Tigers countries
Produce light manufacturing (i.e. textiles)
Labour intensive (i.e. Labour to capital ratio [L/K] is high)
L/K ratioWages/ProfitsImpact of Trade
East AsiaHigh LowW , P
USA low High W, P
If only East Asia and USA exist in the world:
East Asia would produce textiles for both countries, and USA would produce machinery
East Asia would have to pull resources from other industries to produce
textiles for both countries
Clothing (textiles) for machinery:
oTotal demand for labour in East Asia would go up since its so
much more labour intensive than other industries (wages would
Snapshot view: only thing that happens after trade is the reallocation of resources