Econ 260W Seminar on Globalization with Prof Ben Zissimos

1
Econ 260WSeminar on GlobalizationwithProf Ben
Zissimos

• Globalization, Trade
• and the
• Concept of Comparative Advantage

2
Why Trade? Introduction

• Globalization covers a range of issues, including
  international trade, outsourcing and immigration.
• Understanding the motivation behind international
  trade helps us to understand the motivation
  behind other areas of globalization as well. We
  will motivate international trade first, then
  move on to other areas later.
• At the beginning of the 21st century, nations are
  probably more closely linked through trade in
  goods and services, through flows of people, and
  through investment in each others economies than
  ever before.

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Why Trade? Introduction

• Exports and Imports
• as a Percentage of U.S. National Income

4
Why Trade? Introduction

• Exports and Imports
• as Percentages of National Income in 1994

5
Why Trade? Introduction

• Countries engage in international trade for two
  basic reasons
• They are different from each other in terms of
  technology or the skill level of their labor.
• They try to achieve scale economies in
  production.
• The Ricardian model is based on differences in
  technology across countries. Here we think of
  technology very broadly to include, for example,
  more appropriate climate for growing grapes.
• These technological differences are reflected in
  differences in the productivity of labor across
  industries.

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The Concept of Comparative Advantage

• The opportunity cost of x in terms of y is the
  quantity of y that must be given up in order to
  have another unit of x.
• The opportunity cost of wine in terms of cheese
  is the number of cheeses that could have been
  produced with the resources needed to produce a
  bottle of wine.
• A country has a comparative advantage in
  producing a good if the opportunity cost of
  producing that good in terms of other goods is
  lower in that country than it is in other
  countries.

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A One-Factor Economy

• What determines comparative advantage?
• Assume that we are dealing with an economy that
  we call Home. In this economy
• Labor is the only factor of production.
• Only two goods (say wine and cheese) are
  produced.
• The supply of labor is fixed in each country.
• The productivity of labor in each good is fixed.
• Perfect competition prevails in all markets.

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A One-Factor Economy
Homes Production Possibility Frontier
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A One-Factor Economy

• Now we will introduce a second country that we
  will call Foreign.
• The basic structure of the economy is the same as
  home.
• But Foreign has access to different production
  technologies.

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Trade in a One-Factor World
Foreigns Production Possibility Frontier
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Trade in a One-Factor World

• The Gains from Trade
• If countries specialize according to their
  comparative advantage, they all gain from this
  specialization and trade.
• One way to see the gains from trade is to
  consider how trade affects consumption in each of
  the two countries.
• The consumption possibility frontier states the
  maximum amount of consumption of a good a country
  can obtain for any given amount of the other
  commodity.

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Trade in a One-Factor World
Trade Expands Consumption Possibilities
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Trade in a One-Factor World

• In the absence of trade, the consumption
  possibility curve is the same as the production
  possibility curve.
• Trade enlarges the consumption possibility for
  each of the two countries.