Brawley, Chapter 7, The Politics of Trade

Brawley, Chapter 7, The Politics of Trade - Power, Money,...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
The Reasons for Conducting Trade: Comparative Advantage: Comparative advantage: ability to produce a good/service more efficiently than another actor (Adam Smith): o Benefits: More goods to go around (through trade) Overall consumption increase Improved efficiency Greater volume of goods and services o Involves specialization and division of labor Autarky: country consumes only what is produced within its own borders Production Possibilities Frontier (PPF): graphical representation of the limit to how much a country can produce in a given time period: establishes price of each good: o Ricardo: represents it as a downward-sloping straight line (usually convex, see page 146 of textbook for illustration) Rate of transformation: rate where production can be shifted from one product to another Result of specialization: maximum production possible out of any combination of production mixes: o Trade: takes place because of the relative prices of the goods in the two countries Comparative advantage: exists when one country can produce an item at a lower cost in terms of opportunities forgone than the other country Absolute advantage: exists when a country can use fewer resources to produce a product that the other country (does not replace comparative advantage: each country still has different prices for the products domestically) Assumptions of comparative advantage theory: o Economy is at full employment o Trade is balances o Availability and price of inputs can be altered via policy The Consequences of Specialization: Division of labor: many critical of neoclassical economics find this negative: o Marxists: Modern-World System: some states enter into the international division of labor and get frozen in place: unable to escape the economic role in which they are initially cast o Realists: states are pursing power, not wealth: it is all relative, just want more wealth compared to neighbors: Prisoner’s dilemma: applies to trade: (best outcome in both countries pursuing free trade policies) Outcome without cooperation: both states pursue protectionist policies (allow state control of distribution of gains from trade) The Domestic Impact of Trade: Eli Heckscher and Bertil Ohlin: explanation for why country should specialize: o Heckscher-Ohlin (O-H) model: each country can be assessed on its factors of production (endowments of inputs): Two countries with two factors of production (capital and labor): Each country exports goods which intensively use the locally most
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/28/2011 for the course POLI 243 taught by Professor Markbrawley during the Spring '09 term at McGill.

Page1 / 4

Brawley, Chapter 7, The Politics of Trade - Power, Money,...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online