Chapter 23 Gains from International Trade
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Transcript of Chapter 23 Gains from International Trade
![Page 1: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/1.jpg)
Chapter 23Gains from
International Trade
Chapter 23Gains from
International Trade
![Page 2: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/2.jpg)
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
Cloth (metres m)
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
a
Less developedCountry, population 500
Less developed country Developed country
Wheat(kilos m)
Cloth(metres m)
Wheat(kilos m)
Cloth(metres m)
abcdef
1000 800 600 400 200 0
0100200300400500
ghIjklm
12001000 800 600 400 200 0
0 400 8001200160020002400
![Page 3: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/3.jpg)
Cloth (metres m)
Less developed country Developed country
Wheat(kilos m)
Cloth(metres m)
Wheat(kilos m)
Cloth(metres m)
abcdef
1000 800 600 400 200 0
0100200300400500
ghIjklm
12001000 800 600 400 200 0
0 400 8001200160020002400
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
a
b Less developedcountry
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
![Page 4: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/4.jpg)
Cloth (metres m)
Less developed country Developed country
Wheat(kilos m)
Cloth(metres m)
Wheat(kilos m)
Cloth(metres m)
abcdef
1000 800 600 400 200 0
0100200300400500
ghIjklm
12001000 800 600 400 200 0
0 400 8001200160020002400
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
a
b
c
d
e
f
Less developedcountry
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
![Page 5: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/5.jpg)
Cloth (metres m)
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
This is just like an ordinary budget
constraint :
Remember if M=PxX+PYY
And the slope =-Px/Py
![Page 6: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/6.jpg)
Cloth (metres m)
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
Except now it is the budget constraint of a
country.
GNP=2W+1C
And the slope= -PC/PW=-2/1
![Page 7: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/7.jpg)
Cloth (metres m)
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
And just like with a consumer we can
represent a country’s tastes by indifference
curves (social indifference curves).
![Page 8: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/8.jpg)
Cloth (metres m)
Less developed country Developed country
Wheat(kilos m)
Cloth(metres m)
Wheat(kilos m)
Cloth(metres m)
abcdef
1000 800 600 400 200 0
0100200300400500
ghIjklm
12001000 800 600 400 200 0
0 400 8001200160020002400
Whe
at (
kilo
s m
)
0
200
400
600
800
1000
0 200 400 600 800 1000
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
![Page 9: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/9.jpg)
Cloth (metres m)
Less developed country Developed country
Wheat(kilos m)
Cloth(metres m)
Wheat(kilos m)
Cloth(metres m)
abcdef
1000 800 600 400 200 0
0100200300400500
ghIjklm
12001000 800 600 400 200 0
0 400 8001200160020002400
Whe
at (
kilo
s m
)
0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Cloth (metres m)
Less developedcountry
DevelopedCountry
Population300
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
0
200
400
600
800
1000
0 200 400 600 800 1000
![Page 10: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/10.jpg)
Cloth (metres m)
0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Developedcountry
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
Similarly the “budget constraint” of this
country is :
GNP=4W+8C
And the slope=-PC/PW=-4/8=-1/2
![Page 11: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/11.jpg)
Cloth (metres m)
0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Developedcountry
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
And again tastes in this country are represented by a social indifference
curve
![Page 12: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/12.jpg)
0
200
400
600
800
1000
0 200 400 600 800 1000
Cloth (metres m)
Less developed country Developed country
Wheat(kilos m)
Cloth(metres m)
Wheat(kilos m)
Cloth(metres m)
abcdef
1000 800 600 400 200 0
0100200300400500
ghIjklm
12001000 800 600 400 200 0
0 400 8001200160020002400
Whe
at (
kilo
s m
)
a
b
c
d
e
f0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Cloth (metres m)
gh
ij
kl
m
Less developedcountry
Developedcountry
Slope -2/1 Slope -1/2
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
![Page 13: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/13.jpg)
0
200
400
600
800
1000
0 200 400 600 800 1000
Cloth (metres m)
Whe
at (
kilo
s m
)
a
b
c
d
e
f0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Cloth (metres m)
gh
ij
kl
m
Less developedcountry
Developedcountry
Slope -2/1 Slope-1/2
Pre-trade production and consumption possibilitiesPre-trade production and consumption possibilities
Developed countries relative pre-trade price =Pc/Pw=1/2
Less-Developed countries relative pre-trade price =Pc/Pw= 2
![Page 14: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/14.jpg)
0
200
400
600
800
1000
0 200 400 600 800 1000
Cloth (metres m)
Whe
at (
kilo
s m
)
a
b
c
d
e
f0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Cloth (metres m)
gh
ij
kl
m
Less developedcountry
Developedcountry
Slope -2/1 Slope -1/2
So C is relatively cheap in the Developed countries (it has a comparative advantage in cloth)
And relatively expensive in the Less-Developed countries where wheat is relatively cheaper (and it
has a comparative advantage in wheat)
![Page 15: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/15.jpg)
0
200
400
600
800
1000
0 200 400 600 800 1000
Cloth (metres m)
Whe
at (
kilo
s m
)
a
b
c
d
e
f0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Cloth (metres m)
gh
ij
kl
m
Less developedcountry
Developedcountry
Slope -2/1 Slope -1/2
If we now allow free trade between the two countries, the free trade price must lie between the
two sets of AUTARKY prices
2
1
P
P2
TW
TC
![Page 16: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/16.jpg)
0
200
400
600
800
1000
0 200 400 600 800 1000
Cloth (metres m)
Whe
at (
kilo
s m
)
a
b
c
d
e
f0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Whe
at (
kilo
s m
)
Cloth (metres m)
gh
ij
kl
m
Less developedcountry
Developedcountry
Slope -2/1 Slope -1/2
If we now allow free trade between the two countries, the free trade price must lie between the
two sets of AUTARKY prices
1P
PSuppose
TW
TC
![Page 17: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/17.jpg)
0
200
400
600
800
1000
0 200 400 600 800 10000
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Effect of trade on consumption possibilitiesEffect of trade on consumption possibilities
Cloth (metres m)
Whe
at (
kilo
s m
)
Whe
at (
kilo
s m
)
Cloth (metres m)
Less developed country Developed country
1P
PSuppose
TW
TC
![Page 18: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/18.jpg)
Effect of trade on consumption possibilitiesEffect of trade on consumption possibilitiesW
heat
(ki
los
m)
0
200
400
600
800
1000
0 200 400 600 800 10000
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
Cloth (metres m)
Whe
at (
kilo
s m
)
Cloth (metres m)
Less developed country Developed country
Slope 1/1 Slope 1/1
Possibilities have clearly risen
So can’t be worse off!!
![Page 19: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/19.jpg)
0
400
800
1200
1600
2000
2400
0 400 800 1200 1600 2000 2400
0
200
400
600
800
1000
0 200 400 600 800 1000
Effect of trade on consumption possibilitiesEffect of trade on consumption possibilities
Cloth (metres m)
Whe
at (
kilo
s m
)
Whe
at (
kilo
s m
)
Cloth (metres m)
Less developed country Developed country
Imports
600
Exports600
600
Imports
Exports
600
x
y
![Page 20: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/20.jpg)
THE ADVANTAGES OF TRADETHE ADVANTAGES OF TRADE
• The law of comparative advantage
– specialisation as the basis for trade
– the gains from trade based on comparative advantage
A more solid and general way of looking at this is by looking at Production Possibility Frontiers:
• The law of comparative advantage
– specialisation as the basis for trade
– the gains from trade based on comparative advantage
A more solid and general way of looking at this is by looking at Production Possibility Frontiers:
![Page 21: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/21.jpg)
Equilibrium before tradeEquilibrium before trade
O
Go
od
m
Good x
Previously could switch workers from cloth to
wheat at the same rate
e.g. in Developed Country at rate of 8 cloth to 4
wheat
![Page 22: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/22.jpg)
Equilibrium before tradeEquilibrium before trade
O
Go
od
m
Good x
But more likely the productivity of workers would decline as more
and more were switched
From Cloth
(Export good x)
to wheat
(import good M)
![Page 23: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/23.jpg)
Equilibrium before tradeEquilibrium before trade
O
Go
od
m
Good x
Productionpossibility curve
So rate declines as output of cloth falls and
wheat rises
So shape of country’s
production possibilities is
not a straight line but a curve
![Page 24: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/24.jpg)
Equilibrium before tradeEquilibrium before trade
O
Go
od
m
Good x
Productionpossibility curve
Slope = -MCx / MCm = -MRT
![Page 25: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/25.jpg)
O
Go
od
m
Good x
Socialindifference
curves
I3
I2
I1
Equilibrium before tradeEquilibrium before trade
![Page 26: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/26.jpg)
O
Go
od
m
Good x
I3
I2
I1Autarky Price ratio
Slope = -Px / Pm
Equilibrium before tradeEquilibrium before trade
![Page 27: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/27.jpg)
At P1C1
MCx Px MUx= =
MCm Pm MUm
O
Go
od
m
Good x
I3
I2
I1
P1C1
Equilibrium before tradeEquilibrium before trade
![Page 28: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/28.jpg)
EquilibriumEquilibrium with with tradetrade
O
Go
od
m
Good x
I3
I2
World price ratio
P2
MCx PxT
= MCm Pm
T
P1C1
![Page 29: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/29.jpg)
O
Go
od
m
Good x
I3
I2
World price ratio
MUx PxT
= MUm Pm
T
C2
P1C1
P2
EquilibriumEquilibrium with with tradetrade
![Page 30: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/30.jpg)
O
Go
od
m
Good x
I3
I2
World price ratio
ImportsP1C1
P2
C2MC
MP D
EquilibriumEquilibrium with with tradetrade
![Page 31: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/31.jpg)
O
Go
od
m
Good x
I3
I2
World price ratio
Imports
Exports
P1C1
P2
C2MC
MP
XC XP
D
EquilibriumEquilibrium with with tradetrade
![Page 32: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/32.jpg)
O
Go
od
m
Good x
I3
I2
World price ratio
C2
P1C1
P2
Reason for tradeReason for trade
IF Prices Differ IF Prices Differ Then Trade Is Then Trade Is
Profitable for AllProfitable for All
![Page 33: Chapter 23 Gains from International Trade](https://reader036.fdocuments.in/reader036/viewer/2022081503/56812d8a550346895d929fa2/html5/thumbnails/33.jpg)
Why might prices differ?Why might prices differ?
• Different technology or physical capabilitiesDifferent technology or physical capabilities– (Land/Minerals)(Land/Minerals)
• Differences in Factor EndowmentsDifferences in Factor Endowments– Labour/CapitalLabour/Capital
• Different tastes Different tastes – (same Technology & Factors)(same Technology & Factors)
• Differences in Taxes or competitionDifferences in Taxes or competition– (Monopoly pushes prices up)(Monopoly pushes prices up)