IB 3101 Lecture Notes - Lecture 5: Paul Krugman, North American Free Trade Agreement, Wassily Leontief

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Published on 19 Mar 2017
Course
Week 5- Chapter 5 International Trade Theory
Part 1- Older Versions of Trade Theories (16th CE 1950s)
Free Trade
No govt intervention in what citizens can buy / sell from other countries
No quotas, tariffs, subsidies
Trade Theories
Do it even if you can produce on your own
Allows you to specialize in exporting products efficiently
Import products are produced efficiently by other countries
The Pattern of International Trade
Refers to which countries produce which goods.
Gains from international trade usually come from two sources:
Greater production efficiency due to division of labor (specialization)
The ability to exchange goods with trade partners who specialize in things we make
less efficiency.
Innovation that comes from specialization
It may seem counterintuitive, but the main gains from trade arise from
IMPORTING. Most people dont understand this, and most governments behave as
though the goal of trade were to export.
Mercantilism
Maintain trade surplus
o Maximize export through subsidies
o Minimize imports through tariffs and quotes
o Export > import
Increased exports leads to inflation and higher prices because
countries were on a gold standard, so having more gold
increased a countrys money supply and led to inflation
Increased imports lead to lower prices
Result: the exporting country sells less because of high prices
and the importing country begins to export because of lower
prices
In the long run, no one can keep a trade surplus
Promotes involvement in govt
The US has a 60 billion dollar trade deficit with Mexico. It has been a one-
sided deal from the beginning of NAFTA
o Weaknesses:
Zero sum game
1 sided deal
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More an economic system / way to make money prior to Adam
Smiths time
Theory says you should have a trade surplus
Maximize export through subsidies
Minimize imports through tariffs and quotas
Flawed theory not true. If we are running a trade deficit. It is
not necessarily a bad thing.
Neo- mercantilism- still a problem today
Theory of Absolute Advantage
Efficiency
Specialize
Export what you are best at
Import what someone else is best at
Adam Smith 1776
o Wealth of nations
Theory of Comparative Advantage
Specialize in goods most efficiently produced
Still makes sense to trade even if one country is better than another at
everything
David Ricardo 1817
Total output is higher
Trade is positive sum gain
Unrestricted Free Trade Always Beneficial?
Gains may not be as great
o Immobile resources
o Diminishing returns
o Dynamic effect and economic growth
Heckscher Ohlin Theory
1919 + 1933
Comparative advantage arises from differences in national factor
endowments (land, labor, capital)
Predicts countries will export goods that intensively abundant local factors of
production
Consequence: import goods that use scarce local factors
o Trade in final goods essentially substitutes for the movement of
factors of production between countries. Trade in goods is really just
trade in the services of the factors of production that make the goods.
Ex. Saudi Arabia is abundant in oil, so export that but scare in land so import
wheat
USA imports cheap labor from Mexico and Central America for agriculture
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