Pugel.Chapter3 - International Economics Dr. McGahagan...

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International Economics Dr. McGahagan Pugel. Chapter 3. Why Everybody Trades: Comparative Advantage Historical background: Many of the basic texts are online, and linked to from my web page. Mercantilism: Thomas Mun, England's Treasure by Foreign Trade (1664) David Hume: "Of the Balance of Trade" (1752); price-specie flow mechanism Adam Smith: The Wealth of Nations (1776) Book IV, Chapter 1. "Of the Principle of the Commercial or Mercantile System" Book IV, Chapter 2. "Of Restraints on the Importation of Such Goods as can be Produced at Home" Thomas Malthus, "Observations on the Effects of the Corn Laws" (1814) David Ricardo, Principles of Political Economy (1817). Chapter 7, "Of Foreign Trade" Limits of the analysis of chapter 2: -- Uses partial rather than general equilibrium analysis. Focuses on one market in one country; trade necessarily involves more than one market and more than one country. What happens in one market affects what happens in others -- expanding production of one good takes resources away from the production of others, and so has an opportunity cost . -- Does not try to explain the sources of comparative advantage in international trade. Demand and supply curves are given rather than derived from the available resources and technology. -- Does not explain income distribution effects of trade among producers. Does international trade benefit capitalists, landlords, or workers? Does it harm some groups of producers while harming others? To note in the chapter: Mercantilism case study (p. 33) Lecture will expand on the policies of mercantilism (tariffs, maximum wage legislation, prohibition of specie export) as seen in policies of Elizabeth I and Jean-Baptiste Colbert. Adam Smith's notion of absolute advantage (and from lecture, "vent for surplus"). Malthus' worry about the loss of English absolute advantage and his defense of the Corn Laws . Ricardo's concept of comparative advantage (Chapter 7 of his Political Economy ). Principle of comparative advantage: Comparative advantage in a product goes to the low opportunity cost producer of a good. In what sense does absolute advantage matter (p. 40-41) Focus on the tools used and make sure you get the definitions of(they will be used through the first half of the course). Production function : Example: Qx = 5 Lx where 5 is the productivity coefficient. Activity requirement: In the above example, if the productivity coefficient is 5, it requires 1/5 of a unit of labor to produce one unit of the good. The activity requirement is 1/5. Text p.34 and p.35 tables label the activity requirements as "Labor hours to make" Production possibility frontier (or production possibility curve in text) Be able to derive a Ricardian PPF from given labor endowments and production functions. Trade line:
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Pugel.Chapter3 - International Economics Dr. McGahagan...

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