Summary GPE readings week 1-3

GPE Readings week 1 – 3
Week 1 – Chapter 2
international trade in goods and services plays an important role in the
world economy as one of the main features of globalization.
Gains from trade
1. Absolute advantage
2. Comparative advantage
a. Ricardian model
b. Heckscher-Ohlin model

Absolute advantage
- Adam smith (reaction to mercantilism): absolute advantage refers
to a country’s ability to produce a good or service with fewer real
resources or inputs than another country. This can also be looked at as
the inverse, namely the country’s ability to produce more of a good or
service with the same real resources or inputs than another country.
o The principle = policy suggestion that countries should import
goods from other countries where they are produced more
efficiently
 1 country’s technology is better, using less labour per unit
 > efficient.
- When moving from Autarky to trade, the price will move to the
world level.
o Quantity supplied will increase, while quantity demanded
will decrease.
 The amount by which quantity supplied exceeds quantity
demanded in Vietnam at world price constitutes its exports
of rice.
Limit of absolute advantage: it suggests the possibility that a country
might not have an absolute advantage in anything, and therefore would
have nothing to export at all  this is why we also study comparative
advantage.

Gains from trade
- Moving from autarky to either importing or exporting based on
absolute advantage involves a net increase in welfare for the
country involved.
- It thus makes sense for the overall welfare to give up autarky in favour
of importing or exporting.
o Trade can therefore be mutually beneficial.

Week 1 – Chapter 3
Comparative advantage
1. Ricardian model

, a. It explores the means by which comparative advantage can be
determined by differences in technology between the countries
of the world, and is the subject of this chapter.
b. The Ricardian PPF is linear, because labour requirements per
unit of output are constant.
c. Opportunity costs turn out to be central to the comparative
advantage idea
Example: A country possessing very considerable advantages in
machinery and skill, and which may therefore be enabled to manufacture
commodities with much less labour than her neighbours, may, in return
for such commodities, import a portion of its corn required for its
consumption, even if its land were more fertile, and corn could be grown
with less labour than in the country from which it was imported.
o A country can have a comparative advantage in a good in
which it has an absolute disadvantage.
- In the Ricardian model moving from Autarky to trade involves
complete specialization in production according to comparative
advantage.  in reality opportunity cost acts as a brake on complete
specialization  curved PPFs.


Gains from trade: for the country as a whole, some groups or individuals
will not experience gains, but losses.
Demand Diagonal DD: demand for 2 goods is in the same fixed
proportions, thus these two goods are represented by 1 demand line.
- Any change in preference for the 2 products would rotate the DD line
either up or down.


Week 1 – Chapter 4
2. Heckscher-Ohlin model
a. It explores the means by which comparative advantage can be
determined by differences in resource endowments between the
countries of the world.
- Factors of production are types of resources
that are used in production processes.
o Human capital, physical capital, natural
resources.
It is the interaction of country-based factor
endowments with sector-based factor intensities that
determines patterns of comparative advantage.
- Factor endowments: Features that characterize
countries
- Factor intensities: Features that characterize
sectors across all countries