Unit FourInternational Trade Theory

International Trade Theory

The Trading GameEach person will select an unknown product. Without

revealing the product to the rest of the class, record the degree of satisfaction with the product. (1-Low, 5-High)

Each person will have the opportunity to make a trade within their group. Trading is optional and only the group members may know the products. After the trade, record the degree of satisfaction.

The class will have the opportunity to make a trade. Trading is optional however, the products are fully revealed. After all trading is complete, record the degree of satisfaction.

International Trade Theory

The Trading GameHow did the satisfaction change as the

market of trading opportunities increased?

Unit 4 Vocabulary

Absolute AdvantageComparative AdvantageFactor Endowment TheoryMercantilismOpportunity Cost

Unit 4 Essential Question

What are the various international trade theories and how do they interrelate?

Amplifying Questions

Who is Adam Smith?Who is Adam Smith?

How is mercantilism How is mercantilism applied in modern applied in modern economics?economics?

Essential Question 1International Trade Theory

What is the theory of mercantilism?

Mercantilism Handout

Adam Smith

Known as “Father of Modern Economic Theory.”

Wrote, Inquiry into the Nature and Causes of the Wealth of Nations (1776).

Attacked the Theory of Mercantilism.

Mercantilism

Economic philosophy based on the belief that a nation’s wealth depends on accumulated treasure, specifically precious metals.

Government policies promoted exports and stifled imports.

Trade surpluses were settled in precious metals.

Modern Mercantilism

Modern mercantilism is known as “economic economic nationalismnationalism”.

Trend by some countries to restrict foreign ownership of local businesses and establish strict protectionist laws against imports.

Amplifying Questions

What is absolute What is absolute advantage?advantage?

How is absolute How is absolute advantage calculated?advantage calculated?

Essential Question 2International Trade Theory

What is the theory of absolute advantage?

Absolute Advantage Handout

Theory of Absolute Advantage

Developed by Adam SmithUnder free and unregulated trade, a nation

should specialize in producing those goods it could produce most efficiently (had an absolute advantage, either natural or acquired).

The capability of a nation to produce more of a good with the same amount of input than another country.

Theory of Absolute Advantage

Example:

Output per Unit of Input

United

Commodity States Japan

Tons of Rice 3 1

Automobiles 2 4

Theory of Absolute Advantage

Example:

Output in Days

Rice Autos

Commodity (1 ton) (1 ton)

United States 3 6

Japan 4 5

Amplifying Questions

What is opportunity cost?What is opportunity cost?

How is comparative How is comparative advantage calculated?advantage calculated?

Essential Question 3International Trade Theory

What is the theory of comparative advantage?

Comparative Advantage Handout

Theory of Comparative Advantage

Developed by David Ricardo.If a nation holds an absolute advantage in

the production of two goods trade could still take place with advantages to both countries provided the less efficient country is not equally less efficient in the production of both goods.

Theory of Comparative Advantage

A nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less.

Theory of Comparative Advantage

Example:

Output per Unit of Input

United

Commodity States Japan

Tons of Rice 6 3

Automobiles 5 4

Theory of Comparative Advantage

Example:

Output in Days

Rice Autos

Commodity (1 ton) (1 ton)

United States 3 4

Japan 6 5

Amplifying Questions

What are the factors of What are the factors of production?production?

How should trade be How should trade be conducted using factor conducted using factor endowment theory?endowment theory?

What assumptions are What assumptions are made when using factor made when using factor endowment theory?endowment theory?

Essential Question 4International Trade Theory

What is the factor endowment theory?

Factor Endowment Theory Handout

Factor Endowment Theory

Developed by Eli Heckscher and Bertil Ohlin.

International and interregional differences in production costs occur because of differences in the supply of production factors.

Factor Endowment Theory

Those goods that require a large amount of an abundant – thus less costly – factor will have lower production costs, enabling them to be sold for less on the international market.

Factor Endowment Theory

China, well endowed with labor compared to The Netherlands, ought to concentrate on producing labor intensive goods; The Netherlands, with more capital than labor, should specialize in capital intensive goods.

Factor Endowment Theory

Assumptions:A given technology is universally available.All consumers have the same or similar

tastes.Currency exchange rates remain constant.