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Sub-S. Africa
International Trade involves mostly exchanges among high income countries. Developing countries have increased their relevance, particularly East Asia, but are still a small part.
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Goods
Commercial Services
Goods
Commercial Services
81.4 77.2 86.0 78.8 81.5 42.5 93.8 85.7 71.4 92.8 87.1
18.6 22.8 14.0 21.2 18.5 57.8 6.2 14.3 28.6 7.2 12.9
81.4 85.9 84.1 79.4 76.8 68.2 71.1 81.3 73.4 72.3 74.8
18.6 14.1 15.9 20.6 23.2 31.8 28.9 18.7 26.6 27.7 25.2
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75%
2
25%
High incom e
1980
1985
1990
1995
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Political decisions toward deregulation and liberalization of trade and FDI regulations
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Theory and practice of international trade and foreign investment WHAT WE WILL LEARN
Why do countries export certain goods and imports others? What do countries and populations gain and loose from trade? Why do multinationals exist and what are their effects? Why do governments protect their industries and what are the costs and benefits? What are the effects of different protectionist instruments? How do the institutions that regulate global trade work? What have been the economic and social consequences of the rise in trade and foreign investment with developing nations? What has globalization brought to developing countries?
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Trade policy
Policy Instruments The case for free-trade and exceptions Policies for Strategic sectors Political economy and the realist view
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Recommended textbook
International Economics, 7th edby Krugman P. and Obstfeld M., AddisonWesley
Available in French
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Absolute Advantage
It is the maxim of every prudent master of the family, never attempt to make at home what it will cost him more to make than buy What is prudent in the conduct of every family can scarce be folly in that of a great kingdom If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them
Adam Smith 1776
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Absolute Advantage
NORTH SOUTH
10 3
9
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Output
before
1 northerner (FOOD to MANUF)
after
North specializes in Manufacturing and South in Food There is more of both goods, if specialization follows absolute advantage
Food 10 Manuf
3 Manuf 9
Food
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Comparative Advantage
"A country enabled to manufacture commodities with much less labour that her neighbours may, in return for such commodities, import a fraction of the corn required for its consumption, even if corn could be grown with much less labour than in the country from which it was imported."
David Ricardo
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Comparative Advantage
North is MORE productive in both goods
NORTH SOUTH
10 3
10
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10 Food
10 Manuf
A country has Comparative Advantage in a given good if its relative productivity in that good is higher than in other goods
2x3 6 Manuf
2x9 18 Food
Does the decentralized international market achieve this pattern of specialization? How? Who benefits and who looses from international trade in the freemarket?
Among individuals within a country? Among countries?
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In Autarky...
North Northern worker
They work in both sectors, and trade among them at the autarky relative price
P=p
Manuf
Mn f au
/pFood
In equilibrium, workers must be indifferent between the two sectors. They must get the same wage
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South
Food
NORTH SOUTH
10 3
10
10/10 = 1
9/3 = 3
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PS = 3
PN = 1
Relative Supply(RSN) North Relative demand (RDW) It is the same in both countries if preferences are the same
[Manuf/Agro]S [Manuf/Agro]N
Manuf/Agro
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In Autarky...
Northern worker North Food
The Northerners trade among them at the autarky price PN =1
Manuf
Manuf
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North
Manuf 10
+1
UN
-1/PN = -1
10
Agro
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There are gains from exchange because prices are different: Trade occurs!
What happens to the relative price of Manuf in North? And in the South?
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South
PS < 9/3
Food
Manuf
Manuf
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South
Each country specializes completely in, and exports, the good in which it has comparative advantage
PS < 9/3
Food
Food
Manuf
There is one world price, which is between the initial prices
10/10 < PW <9/3
Manuf
South
Each country specializes completely in, and exports, the good in which it has comparative advantage
PS < 9/3
Food
Food
Manuf
There is one world price, which is between the initial prices
10/10 < PW <9/3
Manuf
3
North and South specialize completely
North produces Manuf only South produces both
1<PW <3 1
North and South produce only Food
Manuf/Food
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Manuf 10
-1/PW -1/PN
North
Manuf
South
UN(Manuf)
1< PW
3
PN =1
PS
<3
=3
UN
1< PW
<3
US(Food)
-1/PW -1/PS
US 9
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10
Food
Food
Manuf 10
-1/PW -1/PN
North
Manuf
South
UN(Manuf)
1< PW
3
PN =1
PS
<3
=3
UN
1< PW
<3
US(Food)
-1/PW -1/PS
US 9
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10
Food
Food
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It can become tradable, if transport costs fall or the productivity advantages widen (globalization).
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Tradables
Goods
Services
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Summary
Comparative advantage:
Consumers react to price differences and buy from lower price foreign producers the goods in which their country does not have comparative advantage (gains from exchange). Producers react to price differences and allocate resources to industries where relative productivity is higher, exporting those goods (gains from specialization).
Every country always has an industry in which it has Comparative Advantage and it is competitive in world markets for that industry.
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