BAR11S.7IE - Dr. Christine M. Shaw [BAR11S.7IE]...

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Dr. Christine M. Shaw [BAR11S.7IE] International Economics Outline for Week 3 I. Week 2 “highlights” II. The equilibrium terms of trade A. Ricardo’s thinking on comparative advantage is not able to explain the distribution of the gains from trade between trading partners 1. This is because Ricardo’s theory relies solely on a supply factor – namely labour – to explain trade and trade patterns → He ignores demand 2. Therefore, the closest Ricardo can come to describing the gains from trade is to portray the outer limits within which the equilibrium TOT will fall a. Figure b. For a country to trade, consuming outside its PPF, it must be able to exchange its export good internationally at a rate more favourable than its domestic TOT i. The area below the US price line is, therefore, irrelevant because in that area the US would get less wheat for autos than it would domestically ii. Similarly, the area above the Canadian price line is irrelevant because in that area Canada would get less autos for its wheat than would be the case domestically iii. Arrive, therefore, at this cone region 3. The next question is where within this cone will the equilibrium TOT be a. To answer this question → can use a different diagrammatic tool → offer curves b. Or can use a non-diagrammatic approach → reciprocal demand III. The theory of reciprocal demand A. Argues that the equilibrium terms of trade depends on the relative strength of each nation’s demand for the other’s product B. Theory is most relevant when both countries are of roughly equal economic size – US and EU, say, or Papua New Guinea and Mauritius versus India and
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BAR11S.7IE - Dr. Christine M. Shaw [BAR11S.7IE]...

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