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Introduction to IR L2.doc

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Political Science
Lilach Gilady

Introduction to International Relations Tuesday, January 17, 2012 International Trade • It has been around since ancient times • Much variation in terms ofthhe thods exchanged • Example: the Salt Trade (8 -16 century AD), the Silk Road • The Age of Exploration; European Maritime Exploration • The Opium Wars (1839-42, 1856-60): British discovered tea which ultimately lead to an economic deficit; cultivated opium in India in order to sell it to China and get tea to England Basic Concepts • Transaction costs; cost of trade (including transportation but also risk etc.) • Opportunity 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; Wealth of Nations 1723-1790 • Believes that countries should specialize and trade o Absolute advantage; the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group • David Ricardo 1772-1823 o On the Principles of Political Economy and Taxation (1817) o It rests on the idea of “gains from trade”  States differ in ability to produce certain goods  No need for absolute advantage in productivity  As long as two states differ in relative productivity of at least two goods within their economies it makes sense for states to specialize and trade; comparative advantage also tells us which good each state should specialize in o Comparative advantage; the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity o Comparative advantage more important than absolute advantage Ricardo’s comparative advantage • Global welfare is maximized if everyone chooses free trade • Each nation’s welfare is maximized by unilateral free trade • Some countries, however, “win” relatively more than others • Relative gains vs. absolute gains • Similarly within a country free trade benefits some and hurts others • Trade as a result involves a political question (“who gets what, when and how” (Laswell)) Domestically who “Wins” and “Loses” • Factors of production: capital, land and labor • The Heckscher-Ohlin Theorem; a country has comparative advantage in producing goods that make relatively intensive use of the country’s relatively abundant factor (e.g. US capital intensive goods; Mexico labor intensive goods) • The Stolper-Samuelson Theorem; owners of relatively abundant factors of production benefit from free trade; owners of relatively scarce factors of production benefit from protectionism • For example: free trade raises wages in labor abundant countri
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