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Principles of International Economics

This topic explores Orthodox and Heterodox trade theories, including Adam Smith, David Ricardo, Heckscher and Ohlin, and Stolper and Samuelson. It focuses on the classical approach, using Smith's model to analyze the welfare gains through specialization based on absolute cost advantages.

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Principles of International Economics

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  1. Principles of International Economics Prof. Dr. Hans H. Bass, Bremen University of Applied Sciences, International Degree Programme in Economics Summer Term 2010

  2. Principles of International Economics Topic 3: Analyzing the Consequences of International Trade

  3. Agenda International Economics • Orthodox Trade Theories Adam Smith David Ricardo Heckscher and Ohlin Stolper and Samuelson • Heterodox Trade Theories

  4. Principles of International Economics Topic 3.1: Orthodox Trade Theories 3.1.1 The Classics: Smith

  5. Welfare gains by specialization according to absolute cost advantages: the model 3.1.1 Smith • two countries (North, South) • natural advantages (sun, rain) • two commodities (wool, wheat) • one factor: labor

  6. A numeric example 3.1.1 Smith

  7. A numeric example 3.1.1 Smith

  8. A numeric example 3.1.1 Smith

  9. A numeric example 3.1.1 Smith

  10. A numeric example: Maximal amount of production, if L = 1,000 3.1.1 Smith

  11. A numeric example: Maximal amount of production in autarky if LN, S = 4,000 3.1.1 Smith

  12. A numeric example: Maximal amount of production in complete specialization if LN, S = 4,000 3.1.1 Smith

  13. The assumptions revisited 3.1.1 Smith • climatic and technical conditions exactly opposite to each other  absolute cost advantage • no technology transfer • labor theory of value • constant marginal costs, constant economies of scale • external trade is a state monopoly • no transport costs • no time for adjustment • factors of production (labor) internally completely mobile, externally completely immobile

  14. In his own words: 3.1.1 Smith

  15. In his own words: 3.1.1 Smith “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

  16. German/Russian Trade, 2005

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