PPT - International Trade
International Trade - Presentation Transcript
- Why should countries trade?
- Absolute advantage;
- Comparative advantage.
- Who should produce goods when using trade advantages as criteria? Opportunity cost.
- Flows of Capital and Goods.
- Negative net exports.
- Would you always expect a country that has few imports and many exports to have much foreign investment?
- If a country can produce a good for less than another country, then the opportunity for advantageous trade exists - and both countries could benefit.
- When a country can produce a good that another country is unable to produce.
- An absolute advantage occurs when one producer uses a smaller amount of inputs to produce a given amount of outputs than another producer.
6. Advantages in Trade
Farmer X has a vegetable farm. It takes him five hours worth of work to harvest one pound of vegetables.
Farmer Z owns a third vegetable farm. He can harvest one pound of vegetable in three hours.
In this example, Farmer Z is said to have the absolute advantage in pistachio production since he is able to produce the largest amount of output in the smallest amount of time.
In this case, it was far more productive for Farmer Z to spend time harvesting vegetables than it was for Farmer X or Farmer Y to do the same.
Farmer Z therefore has a lower cost of production than either of the other two producers.
Applying this idea to international trade leads us to the conclusion that goods should be produced for which the cost of production is lowest.
Farmer Z can harvest 1 pound of vegetables in 2 hours and he can harvest 5 pounds of soybeans in 2 hours.
Farmer Y, on the other hand, can harvest 1 pound of vegetables in 10 hours and 50 pounds of soybeans in 2 hours.
Farmer Y can harvest 1 pound of soybeans in about 2.4 minutes, but it takes Farmer Z about 24 minutes to harvest a pound of soybeans.
12. Each of these farmers only has a fixed number of hours to spend harvesting, each hour spent harvesting vegetables cannot be spent harvesting soybeans, and similarly, each hour spent harvesting soybeans cannot be spent harvesting vegetables.
For every hour Farmer Z spends picking soybeans, he gives up 0.5 pounds of vegetables; and for every hour that Farmer Z spends picking vegetables, he gives up 2.5 pounds of soybeans.
Farmer Y gives up 25 pounds of soybeans for every hour that he spends harvesting vegetables, and for every hour that Farmer Y spends harvesting soybeans, he gives up 0.1 pounds of vegetables.
14. For Farmer Z
15. The producer with the lower opportunity cost of production is said to have the comparative advantage. Notice that in a case with two producers and two products, each producer must have a comparative advantage in one, and not both, products.
We may represent the opportunity cost of one product in terms of the other product for both producers, and then compare these numbers. Whichever producer has the lower opportunity cost has the comparative advantage and should produce that product.
16. Absolute advantage and comparative advantage are theoretically straightforward.
When a producer has an absolute advantage, he can produce a given output by using fewer inputs than any competing producer.
When a producer has a competitive advantage, he can produce one product with a smaller amount of inputs than the competitor.
When either an absolute advantage or a comparative advantage exists, benefits from trade are guaranteed.
17. Flow of Trade
18. To understand flow of capital and goods in and out of countries, we should keep the Y = C + I + G + NX identity in mind.
- NX is of particular interest. NX is defined as the total amount of exports less the total amount of imports.
- NX is positive if a country exports more than it imports.
- NX is negative if a country imports more than it exports, and zero if exports and imports are equal.
If this is a short-term debt, nothing of consequence would occur since Country A has the ability to export more coconuts quickly to make up for the difference.
21. If Debt is Long Term
To repay the debt that Country A owes to Country B, Country B becomes invested in Country A.
22. Any amount of exports that exceeds the total amount of imports results in foreign investment.
NX = NFI where NX is net exports or exports less imports and NFI is net foreign investment.
Simply put, the difference between what a country exports and imports is equal to the amount of foreign investment.
The trade balance can remain fair even if a country imports more than it exports - it must make up the difference through foreign investment.
24. If net exports remain equal to net foreign investment, a few tendencies arise:
- countries with few imports and many exports will tend to have significant foreign investment
- countries with few exports and many imports will also tend to have significant foreign investment
- countries with exports equal to imports will tend to have little investment in foreign countries and little foreign investment.
26. What happens when net exports are negative?
Would you expect a country that has few imports and many exports to have much foreign investment?
A country with few imports would likely have a significant amount of interest in other foreign countries, but little foreign investment in the country.
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