Microeconomics: International Trade Theory

International Trade TheoryWhy countries Trade and reasons for trade restrictionReasons for tradeReasons for tradeSpecialisation and division of labour1. Different goods require dfferent proportions of factor inputs in their production2. Economic resources are unevenly distributed throughout the worls3. Internation mobility of resources is extremely limitedSince it is difficult to move resources between nations, the goods which embody the resources must move4. Intenational trade expands a nations consumption possibilties-essence of tradeEffects of tradeY XReasons for trade5. Vent for surplusA. International trade involves exchange among different nations-should we discriminate-protectionB. Use of different currenciesAbsolute advantage theoryAdamSmith1776Hejustifiestradeonthebasisofdifferencesineffecciencyinproduction-trademaximAbsoluteadvantage-whenacountrycanproducemoreofagoodwithagivenamountofresourcesthananothercountry.Example:Twocountries-BotswanaandSA;twocommodites:beefandrice.Notransportcostsandtradebarriers-easytransferofresourcesfromoneindustrytoanotherwithinthecountryandbetweencountries.Absolute AdvantageCountry BEEF RICE Botswana 20 100 South Africa 10 150 Total 30 250Absolute AdvantageBotswana-absoluteadvantageinproductionofbeefSouthAfrica-absoluteadvantageinproductionofriceBotswanashouldspecialiseinproductionofbeefSouthAfricashouldspecialiseintheproductionofriceSpecialisationMore production than before-total output is greater with specialisation. Country Beef Rice Botswana 40 0 South Africa 0 300 Total 40 300Comparative AdvantageWhat if Botswana has an absolute advantage in both lines? Is there no basis for trade?David Ricardo-comparative advantage or comparative costs-relates to the opportunity costs of producing the goodsA country should specialise and produce goods to which it has a relatively low production costs and import the one it has a relatively high production costs.Comparative AdvantageBotswana has an absolute advanatge in both lines of production.Does that mean there can therefore be no trade?