The Development of Trade Theory

1. The Development of Trade Theory Global Trade and Finance, Professor Bryson

2. Smith on Absolute Advantage, Ricardo on Comparative Advantage • What is the foundation of classical trade theory? • Absolute and comparative advantages relate basically to differences in the endowment of factor proportions enjoyed by different countries.

3. Smith on Absolute Advantage, Ricardo on Comparative Advantage • If a country has an abundance of labor, that country will have a comparative advantage in the production of labor-intensive goods.

4. Smith and Ricardo Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations, 1776 David Ricardo, Principles of Political Economy and Taxation, 1817

5. Heckscher-Ohlin TheoremComparative advantages reflect factor endowments Bertil Ohlin 1899-1979 1977 Nobel Prize • Wrote between 1921 and 1949.

6. Heckscher-Ohlin TheoremComparative advantages reflect factor endowments ELI FILIP HECKSCHER Famous Swedish Economist Wrote on Mercantilism, Swedish History, and International Economics

7. Heckscher-Ohlin TheoremComparative advantages reflect factor endowments • "Countries export commodities produced through the intensive use of factors which they possess in abundance. Labor abundant countries export labor-intensive commodities and import capital-intensive commodities."

8. Leontief Paradox • Who was Leontief? • What was his paradox? • In tests run in the late 1940s, Leontief discovered that the US was actually exporting labor-intensive goods and importing capital-intensive goods. • Better tests were needed disaggregating, for example, skilled and unskilled labor.

9. Stolper-Samuelson Theorem • "When a country exports a commodity produced with intensive use of its abundant factor, that factor's returns will rise.“ • Factors producing commodities that must compete with low-cost imports will suffer declining returns as demand for the ill-favored product declines.

10. Stolper-Samuelson TheoremThe Two Together

11. Modern (“Alternative) Trade Theory • Trade theorists originally conceived of a national economy and national markets. • But somewhere on the periphery of things, there were also some industries enjoying an international comparative advantage.

12. Modern (“Alternative) Trade Theory • That sector could produce world class commodities for a modest export sector. • This sector communicated and traded with buyers in other countries.

13. The Contemporary, Modern View • Now the national economy has gone far down the path of integration with other countries through trade markets. • There is no single, peripheral trade sector.

14. The Contemporary, Modern View • Trade sectors intermingle extensively with all the other sectors of the national economy. • Markets are not national, they are global.

15. Paul Krugman Krugman is one of the leading designers and proponents of the modern theory of trade. Also, he is a leading spokesman of the liberal wing of the profession. His credentials are impeccable. He Hates George Bush passionately.