LEC9 Trade - Macroeconomic Policy Class Notes International...

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Macroeconomic Policy Class Notes International Trade Revised: November 14, 2011 Latest version available at www.fperri.net/teaching/macropolicyf11.htm Virtually all economists, liberal or conservative, believe that free (or freer) trade is a good thing: good for consumers, good for workers. Why? Because consumers are able to buy products from the cheapest vendor, and workers are able to take jobs that offer the highest wages. But if trade is such a good idea, why do non-economists find the idea so puzzling, and even dangerous? The purpose of this note is to outline the theory of international trade, which you can combine with your own knowledge and experience to make your own judgment about trade and globalization. Ricardo’s theory of trade David Ricardo was one of the most influential economists of the early nineteenth century, but he came to economics by a circuitous route. Born to a Jewish family in Amsterdam, he left the country and broke off relations with his family (and they with him) to avoid an arranged marriage — he married a Quaker instead. He set himself up in London as a government securities dealer and became, in his words, “sufficiently rich to satisfy all my desires and the reasonable desires of all those about me.” Looking for something to occupy his time, he developed the modern theory of international trade. Many people of Ricardo’s day (and ours!) regarded trade as a zero-sum activity: if you gain from trade, then I must lose. As Adam Smith in his Wealth of the Nations puts it All political writers since the time of Charles II had been prophesying that in a few years we would be reduced to an absolute state of poverty [by international trade], but we find ourselves far richer than before. That trade is good for consumers is easy to understand; more trade means more choices and having more choices is at least as good as not having them. That trade is
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International trade 2 good for producers is a bit less immediate. The argument uses the idea of specializa- tion. Take Minnesota and Florida: Minnesota is good at producing corn and Florida is good in producing oranges and both Minnesotans and Floridians like to consume oranges and corn. In absence of trade some oranges will be produced in greenhouses in Minnesota and some corn will be grown in the Florida swamps: but productivity in those two activity is not very high and thus producers in those two sectors will not be doing very well. When Florida and Minnesota open up to trade Minnesota can specialize in corn and Florida in oranges, meaning, for example, that producers of oranges in Minnesota can turn to producing corn. The demand for their corn will come from Florida and they will have higher productivity so they are also better off.
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LEC9 Trade - Macroeconomic Policy Class Notes International...

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