it-lec-3.pptx

BITS PilaniHyderabad Campus

BITS Pilani presentation

Tanay KumarFractalink Design studio

BITS PilaniHyderabad Campus

Course No. ECON C372- International Trade and BoP- Lec-3Date: 12.1.2013

BITS Pilani, Hyderabad Campus

Learning Objectives

1. What is the basis for trade and what are the gains from trade?

2. What is the pattern of trade? That is, what commodities are traded and which commodities are exported and imported by each nation?

CHAPTER 2 The Law of Comparative Advantage


The Mercantilists’ Views on TradeDuring 17th and 18th centuries group of men wrote essays and

pamphlets on international trade that advocated an economic policy known as mercantilism.

According to this view, nation’s become rich and powerful was to export more than imported.

The resulting export surplus would than be settled by an inflow of bullion, or precious metals, primarily gold and silver.

Thus the government had to all, in its power to stimulate the nation’s exports and restrict nation’s imports.


Munn’s Mercantilistic Views on TradeThomas Mun (17 June 1571 – 21 July 1641) was an English

writer on economics who has been called the last of the early mercantilists. He was among the first to recognize the exportation of service, or invisible items, as valuable trade, and made early statements strongly in support of capitalism

Thomus Munn (1571-1641) was perhaps the most influential of the mercantilist writers, and his England’s Treasure by Foreign Trade was outstanding exposition of mercantilist thought on trade.


Following is the excerpt from Munn’s writing …….. We must ever observe this rule; to sell more to strangers yearly than we consume of theirs value. For …… that part of our stock [exports] which is not returned to us in wares [imports] must necessarily be brought home in treasure [bullion]……

Mercantilism was the dominant school of thought in Europe throughout the late Renaissance and early modern period (from the 15th to the 18th century).


Mercantilism encouraged the many intra-European wars of the period and arguably fueled European expansion and imperialism — both in Europe and throughout the rest of the world — until the 19th century or early 20th century.

England began the first large-scale and integrative approach to mercantilism during the Elizabethan Era (1558–1603).

An early statement on national balance of trade appeared in Discourse of the Common Weal of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them”.


Introduction

While the mercantilists believed that one nation could gain only at the expense of another nation and advocated strict government control of all economic activity and trade,

Adam Smith believed that all nations would gain from free trade and strongly advocated a policy of Laissez-faire (little government interference).

According to him, free trade could cause world resources to be utilised most efficiently and would maximise world welfare.

Trade Based on Absolute advantage


According to Adam Smith, trade between two nations is based on absolute advantage. When one nation is more efficient than another in the production of one commodity but less efficient than the other nation in producing the a second commodity then both nations can gain by each specializing in the production of the commodity in which they have absolute advantage.

By this process, resources are utilized in the most efficient way and output of both commodities will rise.


ILLUSTRATION OF ABSOLUTE ADVANTEAGEAbsolute advantage

U.S U.KWheat (bushels/man-hour) 6 1Cloth (yards/man-hour) 4 5If US exchanges 6 W = 6CUS gains 2C or ½ man-hourUK gains 24C or 5 man-hours


After trade assuming that US completely specializes in wheat and UK specializes in cloth

U.S U.KWheat (bushels/man-hour) 12 0Cloth (yards/man-hour) 0 10

12 10

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