1 comparative advantage: a basic example productivities endowments (here, labor forces) winedrape...
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1
Comparative advantage: A basic example
ProductivitiesEndowments (here, labor
forces)Wine Drape
Portugal 8 4 5
UK 1 2 20
Assumptions
• Two countries (Portugal and the UK)• Two industries (wine and drape)• One factor of production (labor), hence one type of agent in each country (workers)• Constant returns to scale• No transportation costs• No government intervention• Perfect competition
Portugal’s production-possibility frontier and the autarky (before-trade) equilibrium
Wine
Drape
40
20
Production possibility frontier(supply side)
Consumption point withoutinternational trade
Consumer preferences(demand side)
The UK’s production-possibility frontierand the autarky equilibrium
Wine
Drape
20
40
Production possibility frontier(supply side)
Consumption point withoutinternational trade
Indifference curve (demand curve))
The world’s production-possibility frontierand trading equilibrium
Wine
Drape
40
40
World production possibility frontier
Consumption point withinternational trade
Consumer preferences(common to all countries)
United Kingdom
Portugal
world price ratio(demand-determined)
5
The gains from exchange
Production Consumption
Wine Drape Wine Drape
Portugal 40 0 20 20
UK 0 40 20 20
Total 40 40 40 40
6
The gains from exchange revisited
Indifference curves
Wine
ProductionPossibility
Frontier
Drape
world priceratio
7
The gains from specialization
Indifference curves
Wine
ProductionPossibility
FrontierDrape
world priceratio
Productionpoint
8
The Rybszinski theorem
initial production possibilityfrontier
steelproduction possibility frontierafter an increase in the capital endowment
production possibility frontierafter an increase in the labor endowment
drape
9
The Heckscher-Ohlin theorem
“trade triangle”
steel
drape
(world & domestic)indifference curves
domestic price ratio (before trade)
domesticPPF
world price ratio(drape is cheaper)
hom
e st
eel e
xpor
ts
home drape imports
10
The gains from trade (i): initial equilibrium
D
D*
P P
S
S*
Pa
P*a
Country F (relatively inefficient)Country H (relatively efficient)
Quantities
12
Home ES
a b c d
ab = cd
Foreign ED*a b c d
Pa
Pa*
Equilibrium price
Method 2
a) Construct excess supply (ES) and excess demand (ED) curves
ab = cd
Export supply
Import demand
13
Pw
S
D
S*
D*
ESP*a
E=M*
ED*
Equilibrium price, method 2
b) Match the home ES and foreign ED curves on single « world » market
Pa*
Pa
Country H(exporter)
Country F(importer)« World » market
Quantities
14
AP
(a) Importer country’s domestic market (b) same thing seen on world market
World price
C
EDD
G
B
HF J
I
Kpa
p*
Gains from goods trade
Importer country
consumers’ gain, producers’ loss = neutral
15
Gains from goods trade
Exporter country
A ES
EF
FD
B
pa
p*
C
E G H
I
World price
(a) Exporter country’s domestic market (b) same thing seen on world market
producers’ gain, consumers’ loss = neutral
16
Net increase in importer country’s welfare = CS gain – PS loss
Who gains from trade
Size and « similarity »
ED
ES
Net increase in exporter country’s welfare = PS gain – CS loss ED
ES
ED
ESSIZE
SIMILARITY
ED
ES
ED
ES
More « different » exporter gains more from trade
Larger exporter gains less from trade
17
Very similar to trade in G&S:
Identical causes: differences in prices (factor rewards)
Identical consequences: some gains, other loose, and there is a net potential gain.
Gains from factors trade
Starting point: autarky
r
K
ra
K
Return to capital
Value of marginal product of capital
Economy’s capital stock
Return to other factors
+ = GDP (equal to GNP in autarky)
18
Two countries, H relatively well endowed with capital.
Initially, rH < rF, so capital has an incentive to migrate from H to F
In equilibrium, the marginal products of capital are equalized.
Gains from capital movements: EBC for H, EIB for F.
rW
rH
rFEI
B
C
A
D G
VH = pFK
VF = p*F*K
Gains from factors tradeCapital flow from Home to Foreign
Home capital stock (before outflow)
Foreign capital stock (before inflow)
Extension of foreign capital stock (because of inflow)
19
VH=pFK
VF=p*F*K
Gains from factors trade
GNP vs. GDP, efficiency gain
GNP GNP*
Home country’s GDP
Foreign country’s GDP
Efficiency gain from capital flow
20
IRL
NLD
CHE
SWE
ISL
NOR
FINDNK
AUT
GBRDEU
ITAFRA
ESP
TUR
PRT
GRC
0
20
40
60
80
100
120
140
1.00E+09 1.00E+10 1.00E+11 1.00E+12 1.00E+13
PPP GDP
trad
e sh
are
(% o
f GD
P)
Openness and size
Larger countries
trade less (not so obvious)
Trade share in GDP
GDP at purchasing power parity
Not very open given their size
(should trade more)
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