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International Economics & Trade Theory

International Economics & Trade Theory. CIA4U – Unit 5. Globalization. DEFINED: the increasing international flow of “stuff” goods & services production and manufacturing people information & ideas culture diseases. Globalization. International trade theory tells us:

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International Economics & Trade Theory

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  1. International Economics & Trade Theory CIA4U – Unit 5

  2. Globalization • DEFINED: the increasing international flow of “stuff” • goods & services • production and manufacturing • people • information & ideas • culture • diseases

  3. Globalization • International trade theory tells us: • increased trade between countries will make us ALL better off • trade is good • specialization is good • trade barriers (tariffs, taxes, fees) are bad (economically-speaking) • Similar to “free market” theory

  4. Globalization and Trade Theory • David Ricardo – 1817 • outlined mutual benefits of trade • Example: • Two nations, England and Portugal; two goods being produced – wine and cloth • Ceteris paribus conditions: • full employment • full use of resources • no changes in technology • perfect competition • no international migration of resources

  5. Globalization and Trade Theory – An Example • If they dedicated all resources to wine: • England: 100 bottles • Portugal: 400 bottles • If they dedicated all resources to cloth: • England: 100 tonnes • Portugal: 200 tonnes

  6. Globalization and Trade Theory • With the same amount of labour, Portugal is better able to produce both goods • This is called an absolute advantage • Think about each country’s opportunity cost • Portugal’s OC of 400 wine = not making 200 cloth (2 wine: 1 cloth) • England’s OC of 100 wine = not making 100 cloth (1 wine: 1 cloth) • Who should make wine? • Who should make cloth?

  7. Globalization and Trade Theory • Thus: • England is less productive (ceteris paribus) overall than Portugal, but at home is less worse at producing cloth than wine • Might seem like Portugal should just make its own cloth and wine… • BUT • if England specializes in making cloth (called its comparative advantage) • Portugal specializes in wine • The two countries trade their products, and both are overall better off!

  8. Production Before Trade

  9. Production After Specialization and Trade

  10. Consumption After Trade

  11. Was it Worth it? • Pre-trade and specialization • England: 50 wine, 50 cloth • Portugal: 200 wine, 100 cloth • Post-trade and specialization • England: 75 wine, 50 cloth • Portugal: 225 wine, 100 cloth

  12. Globalization and Current Issues • Classify world’s countries in three levels of development: • Industrialized/developed (i.e. Canada, France, Japan) • Newly industralized (i.e. Mexico, China) • Developing (i.e. Kenya) or underdeveloped (i.e. Sierra Leone)

  13. Issues • What do “rich” countries have to trade? What do they want? • What do “poor” countries have to trade? What do they want?

  14. Simulation • Carry out trade simulation • Debrief • Positives? Negatives?

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