6.0. International Political Economy

Learning Objectives:– Familiar with the subject matter of IPE– Understand the principle relationships

between the economic realm and the political realm in an international context

– Understand the theory of Comparative Advantage

6.0. International Political Economy

What is IPE?

The Growth of IPE

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the building of the Liberal International Economic Order

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the building of the Liberal International Economic Order– Trade!

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the building of the Liberal International Economic Order– The theory of absolute advantage

Absolute Advantage(two countries, two products, one production input (labour)

1 roll of cloth 1 Bushel of wheat

Canada 9 hours 7 hours (more efficient)

India 3 hours (more efficient) 12 hours

• If Canada and India trade, both countries can divert labour to the good they produce most efficiently. For example:– Canada diverts 100 hours of labour from cloth production to

wheat – India diverts 100 hours of labour from wheat production to cloth

Absolute Advantage(two countries, two products, one production input (labour)

Rolls of cloth Bushels of wheat

Canada (100 hours from cloth production to wheat)

-11 rolls (-100 hours divided by 9)

+14 bushels (+100 hours divided by 7)

India (100 hours from wheat production to cloth)

+33 rolls (+100 hours divided by 3)

-8 bushels (-100 hours divided by 12)

• Net gain from trade for Canada and India: 22 rolls of cloth and 6 bushels of wheat

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the building of the Liberal International Economic Order– The theory of comparative advantage: the

cornerstone of liberal economic theory and the basis of the world trading system!

Comparative Advantage(two countries, two products, one production input (labour)

1 roll of cloth 1 Bushel of wheat

Canada 9 hours 7 hours

Mexico 3 hours (more efficient) 6 hours (more efficient)

• Mexico has absolute advantage in cloth and wheat• Canada has comparative advantage in wheat• If Canada and Mexico trade, both countries can divert

labour to the good they produce comparatively efficiently. For example:– Canada diverts 100 hours of labour from cloth production to

wheat – India diverts 50 hours of labour from wheat production to cloth

Comparative Advantage(two countries, two products, one production input (labour)

Rolls of cloth Bushels of wheat

Canada (100 hours from cloth production to wheat)

-11 rolls (-100 hours divided by 9)

+14 bushels (+100 hours divided by 7)

Mexico (50 hours from wheat production to cloth)

+17 rolls (+50 hours divided by 3)

-8 bushels (-50 hours divided by 6)

• Net gain from trade for Canada and Mexico: 6 rolls of cloth and 6 bushels of wheat

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the building of the Liberal International Economic Order– System wide gains from trade

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the building of the Liberal International Economic Order– Problems and challenges arising from

trade

6.1. The Beginning of Globalization: Liberal Economic Theory

Guiding Principles: the Liberal Economic Framework from Bretton Woods to the Washington Consensus

Trade (mutually beneficial exchange)Comparative AdvantageRules and Institutions

Summary

• At the end of this class, you should be able to describe the subject matter of IPE.

• You should be familiar with the relationship between the economic realm and the political realm in an international context.

• You should understand and be able to describe the theory of absolute advantage and the theory of comparative advantage.

• You should be familiar with the central concepts of the Liberal economic framework.