ECN 204 Lecture Notes - Lecture 2: International Trade, Absolute Advantage, Natural Rubber
22 Oct 2017
School
Department
Course
Professor
International trade (Chapter 17)
• What is an open economy
o There are flows of goods among countries
• Goods and services (focus)
• Capital
• Information
• Money - financial flow
• Introduction
o World economics are interconnected. Consumption in most countries is only based on
the goods and services produces internally, but also on what is produced in other
countries.
• Canada and the world
o The volume of trade in Canada is as follows
• Exports are about 28% of Canadian GDP
• Imports are about 29% of Canadian GDP
• Reasons for growth in trade
1. Decrease in transportation cost
2. Decrease in communication cost
3. Low trade barriers
• Dependence
o Interdependence among countries
o Canada almost entirely dependant on other countries for bananas, cocoa, coffee,
spices, tea, raw silk, tin, and natural rubber
o Many Canadian industries rely on sales abroad: agricultural products, computers,
aircraft, automobiles and etc.
o Intra-industry trade
• Example: export and import the same goods (cars)
• Trade balance
o Trade balance is the difference between exports - imports
• If its positive = trade balance surplus (export more than import)
• If its negative = trade balance deficit (export less than import)
• Participants in international trade
o Germany, the United States, China, and Germany had combined exports of over 5
trillion in 2014
o Along with Germany, other western European nations such as France, Britain, and
Italy are major exporters
o Southeast Asian countries of South Korea, Taiwan, and Singapore, have combined
exports which exceed those of France, Britain, or Italy
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find more resources at oneclass.com
o China with its increased reliance on the market system and reintegration of Hong
Kong, has quickly emerged as a major international trader
• The Economic Basis for trade
o Why do nations trade
• The distribution of resource is uneven
• Efficient production requires different technologies or resource combination
• Products are differentiated as to quality and other non-price attributes
o The goods can be classified as follows
• Labour-intensive goods
• Land-intensive goods
• Capital-intensive goods
o Depends on its ability to produce certain goods and country can have:
o Absolute advantage
• A country is said to have an absolute advantage over other producers for a
product if it is the most efficient producer of that product
o Comparative advantage
• A country is said to have comparative advantage over other producers of a
product if it can produce the product at a lower opportunity cost
• The basic principle
o Specialization according to comparative advantage reduces cost
o This is true even if a nation has an absolute advantage
• Specialization and comparative advantage
o Example: Two isolated nations (Canada and Brazil)
1. Constant cost
▪ Straight-line production possibilities curves
2. Different cost
▪ Different technology & resources
3. Canada has absolute advantage in both steel and soybeans
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
International trade (chapter 17: what is an open economy, there are flows of goods among countries, goods and services (focus, capital, money - financial flow. Imports are about 29% of canadian gdp: reasons for growth in trade, decrease in transportation cost, decrease in communication cost, low trade barriers, dependence. Interdependence among countries: canada almost entirely dependant on other countries for bananas, cocoa, coffee, spices, tea, raw silk, tin, and natural rubber, many canadian industries rely on sales abroad: agricultural products, computers, aircraft, automobiles and etc. Intra-industry trade: example: export and import the same goods (cars, trade balance, trade balance is the difference between exports - imports. If its positive = trade balance surplus (export more than import) Italy are major exporters: southeast asian countries of south korea, taiwan, and singapore, have combined exports which exceed those of france, britain, or italy, china with its increased reliance on the market system and reintegration of hong.
