Lecture 13.docx

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31 Mar 2012
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Lecture 13
International trade is as old as society. The salt trade between 8th and 16th AD. Gold for
salt. The silk road from asia to europe carrying silk and spices. In every couples of
kilometers there are •ekhans•f and are buildings used for motels. The govt wanted to
encourage trade so they built these centres so merchants could rest and eat, and they
also collected taxes there. European powers wanted to go to the sources and origins of
asian goods so they began exploring and the European Maritime Explorations were
fueled by trade. Trade was not really peaceful. The Opium Wars between Britain (and
europe) and China. In the 19th century the english discovered tea and they developed a
liking to tea. Britain bought more tea than china bought tweed jackets. Britain started to
cultivate opium in India, they sold tweed to india and india sold opium to china
KACHING. Chinese became addicted to opium very quickly and soon the deficit was on
the chinese. Price of silver started to rise, the chinese govt started to intervene and
banned the trade of opium. The B were furious. And they decided to bomb china, of
course. After the war, B gained control oh Hong Kong and B destroyed palaces and shit.
Transaction costs: cost of trade (including transportation but also risks, etc). There are
always direct costs and indirect costs with trade.
Opp costs: amount of some other good that is lost in order to obtain unit of given good.
Relative prices: the price of a good in terms of other goods (the barter price).
Modern theory of trade
Adam Smith: comes up with a theory of trade (the wealth of nations) and later we have
an improver of smith•fs ideas (David Ricardo or something). Adam Smith just liked to sit
and think, and the result of that was The Wealth of Nations. David read The Wealth of
Nations during vacations and decided to improve it. Adam Smith came up with the
notion of absolute advantage and David came up with comparative advantage.
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Absolute advantage: why trade? To get 4 tons of wheat in the UK, they have to give up 10
tons of iron. However, if they buy it from the US they can get 13.33 tons of wheat for 10
tons of iron. Thus, they should specialize and trade. (earning 9.3 tons of wheat for every
10 tons of iron). The world benefits too, as the production actually increases by
specializing in what they are good with.
Comparative advantage: more subtle advantages, we don•ft really see that trade
supremacy. Ricardo on On The Principles of Political Economy and Taxation. Accents
the notion of gain from trade: states almost always differ in ability to produce certain
goods; no need for absolute advantage in productivity, we can raise earnings without it.
As long as 2 states differ in relative productivity of at least 2 good within their
economies, trade would be profitable and they should have policies to embrace that. It
makes sense for states to specialize and trade. Comparative advantage also tells us in
which good each state should specialize. Global welfare is maximized if everybody
Lecture 13
chooses to trade. Each nation•fs welfare is maximized by unilateral free trade. However,
some countries •ewin•f relatively more than others. Profits are not always split equally
between countries, but they always win. Relative gains vs. Absolute gains. In absolute
terms, trade is good for everyone. In relative terms this might not be the case because
you might need to gain more, so you might be worse off. Trade always brings general
benefits but not always particular. Trade, therefore, involves a political question (who
gets what, when and how -Lasswell)
Absolute vs. Comparative: Betty White and 20 year old male on a desert island. They
need to built shelter and collect food to survive. The 20 year old has an advantage on
everything because of physical abilities. Even if the youngest has an advantage, Betty
White has comparative advantage on at least one thing. Which activity has the smallest
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