geog 216September 21-28

geog 216September 21-28 - September 21, 2009 Lecture 7 Why...

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September 21, 2009 Lecture 7 Why countries trade? Outline Why trade? Differences in factor endowments Other reasons The basics of trade theory Absolute advantage Comparative advantage Gains from trade A numerical example Why do countries trade with one another? National economies have different natural resources, factors of endowment which are distributed unevenly around the globe Also geographical variables; climate, terrain Labour force (quantity, skills)- differences in skill endowment. i.e. in the Canadian case, Canada in relative terms has a greater endowment in fiber optics skills in comparison to china. Technological differences- R&D facilities, private sectors that other countries do not have so engage in trade relations. More reasons to trade? MNC’s- 1/3 of global trade is made up of intra-industry flows. Trade and geography (agglomeration economies)- will want to trade due to economies of scale present in certain regions (i.e. film companies will want to locate to LA because there are positive externalities (i.e. cutting edge) to be had, even if expensive and some disadvantages Advantages and the gains from trade: Differences in FE countries are advantaged (will be more efficient in production) in particular types of production and disadvantaged (less efficient) in others 1
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Advantage: absolute v. comparative. If we do have differences in FE, when countries trade with each other, are they better off in specializing in the goods they have an CA in? Can countries gain from trade? Mutual gains from trade occur when products are redistributed in such a way that countries end up with a combination of goods that is better adapted to their preferences than that combination of goods that they held before trade. Two countries can be better off without changing world supply of goods Bread and wine example -Model Assumptions: Global economy: North and South Each produces only two goods: bread and wine Only one factor of production (labour) Labour, across both countries, is homogenous (no differences in skills) Amount of labour is fixed (100 workers) Technology is constant across both regions i.e. unaffected by trade. R&D does not affect other countries. Trade does not lead to any technological transfer. Cannot adopt a better technology once it is exposed to it by trading. CASE A: Absolute Advantage Alternative outputs from one day of labour (100 workers) South North Bread 30 loaves of bread 100 loaves of bread Wine 90 bottles of wine 80 bottles of wine In relative terms, north is more efficient in production of bread. (absolute advantage in bread) South more efficient in production of wine (Absolute Advantage in wine) A country has an absolute advantage over another in the production of a good if it can produce that good using smaller quantities of resources than can the other country (Adam Smith) 2
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This note was uploaded on 02/01/2010 for the course GEOG 208 taught by Professor Akin during the Spring '10 term at McGill.

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geog 216September 21-28 - September 21, 2009 Lecture 7 Why...

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