Internation al Trade Theories Swapan Preet Singh WMG-242013
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International Trade TheoriesSwapan Preet SinghWMG-242013
Mercantilist Theory
Fewer Imports
More Exports
Gold Silver
Mother’s Country
Manufactured Goods
Colonies
Mercantilism: is an economic policy; wealth is power, key to wealth is export more than import.
0 10 20 30 40 50 60 700
10
20
30
40
50
60
India
Cars
Bike
s
0 10 20 30 40 50 60 700
10
20
30
40
50
60
U.S.
Cars
Bike
s
Absolute Advantage Model-Adam Smith
Efficiency U.S. India
Car/Hour 60 10
Bike/Hour 40 50
Absolute advantage is the ability of a country to produce a good at a lower cost per unit than the cost at which any other country produces.
Absolute Advantage Model-Adam SmithAbsolute advantage is the ability of a country to produce a good at a lower cost per unit than the cost at which any other country produces.
0 10 20 30 40 50 60 700
10
20
30
40
50
60
U.S.
Cars
Bike
s
0 10 20 30 40 50 60 700
10
20
30
40
50
60
India
Cars
Bike
s
U.S. Prod. U.S. Cons. India Prod. India Cons.
Cars 30 30 10 10
Bikes 20 20 0 0
Total 50 50 10 10
No Trade
0 10 20 30 40 50 60 700
10
20
30
40
50
60
India
Cars
Bike
s
Absolute Advantage Model-Adam SmithAbsolute advantage is the ability of a country to produce a good at a lower cost per unit than the cost at which any other country produces.
0 10 20 30 40 50 60 700
10
20
30
40
50
60
U.S.
Cars
Bike
s
U.S. Prod. U.S. Cons. India Prod. India Cons.
Cars 60 50 0 10
Bikes 0 25 50 25
Total 60 75 50 35
-2
3
-1
5
With Trade
0 10 20 30 40 50 60 70 800
10
20
30
40
50
60
India
Cars
Bike
s
0 10 20 30 40 50 60 70 800
10
20
30
40
50
60
U.S.
Cars
Bike
s
Comparative Advantage Model-David Ricardo
Efficiency U.S. India
Car/Hour 70 10
Bike/Hour 35 30
Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another.
Comparative Advantage Model-David RicardoComparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another.
0 10 20 30 40 50 60 70 800
10
20
30
40
50
60
U.S.
Cars
Bike
s
0 10 20 30 40 50 60 70 800
10
20
30
40
50
60
India
Cars
Bike
s
U.S. Prod. U.S. Cons. India Prod. India Cons.
Cars 30 30 5 5
Bikes 20 20 15 15
Total 50 50 20 20
No Trade
Comparative Advantage Model-David RicardoComparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another.
0 10 20 30 40 50 60 70 800
10
20
30
40
50
60
U.S.
Cars
Bike
s
0 10 20 30 40 50 60 70 800
10
20
30
40
50
60
India
Cars
Bike
s
U.S. Prod. U.S. Cons. India Prod. India Cons.
Cars 70 60 0 10
Bikes 0 15 30 15
Total 70 75 20 25
With Trade
Empirical Tests of the Ricardian ModelRelative Labor Productivities and Comparative Advantage-Macdougall
Comparative Advantage b/w More than 2 CommoditiesCommodity Price in U.S. Price in UK
A $2 £6
B $4 £4
C $6 £3
D $8 £2
E $10 £1
Commodity Price in U.S. Price in UK
A $2 $12
B $4 $8
C $6 $6
D $8 $4
E $10 $2Assuming exchange rate of £1=$2
Commodity US UK US Prod. US Cons UK Prod. UK ConsA $2 $12 20 20 3 3B $4 $8 10 10 5 5C $6 $6 10 10 10 10D $8 $4 5 5 10 10E $10 $2 4 4 20 20Total 49 49 48 48
*Assuming Budget of $220 for both nations
No Trade
Comparative Advantage b/w More than 2 Commodities
Commodity US UK US Prod. US Cons UK Prod. UK ConsA $2 $12 40 20 0 20B $4 $8 20 10 0 10C $6 $6 10 10 10 10
D $8 $4 0 7 15 8
E $10 $2 0 15 30 15Total 70 62 55 63
*Assuming Budget of $220 for both nations
With Trade
US Prod. US Cons UK Prod. UK Cons0
10
20
30
40
50
60
70
80
20 20
3 310 10
5 510 10 10 10
5 510 10
4 4
20 20
49 49 48 48
Without Trade
A B C D E Total
US Prod. US Cons UK Prod. UK Cons0
10
20
30
40
50
60
70
80
40
20
0
2020
10
0
1010 10 10 10
07
158
0
15
30
15
70
6255
63
With Trade
A B C D E Total
Comparative Advantage b/w More than 2 Countries
Commodity A B C D EWheat 100 200 300 400 500Cloth 100 100 100 100 100Pw/Pe 1 2 3 4 5
0 25 50 75 1000
10
20
30
40
50
60
70
80
90
100100
50
Country Wise Productivity
A B C D E
Questions?Swapan Preet Singh
WMG-242013
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