Managerial Economics Lecture twelve Standard theories of international competition Theory reality
Managerial Economics Lecture Twelve: Standard theories of international competition Theory & Reality…
An undisputed truth? Belief in superiority of free trade near universal amongst economists Basic proposition put by samuelson nordhaus: Simply put, trade promotes specialization, and specialization increases productivity. "(297 Argument essentially unchanged since Ricardo in 1817: Trade lets countries specialise in producing goods in which they have a comparative advantage Not absolute productivity relative to other country,but Comparative productivity with respect to own industries
An undisputed truth? • Belief in superiority of free trade near universal amongst economists • Basic proposition put by Samuelson & Nordhaus: – “Simply put, trade promotes specialization, and specialization increases productivity.” (297) • Argument essentially unchanged since Ricardo in 1817: – Trade lets countries specialise in producing goods in which they have a comparative advantage: • Not absolute productivity relative to other country, but • Comparative productivity with respect to own industries
Free Trade and specialisation Ricardo's Comparative Advantage Took case Mercantilists argued would mean rival( Portugal) would"defeat"England in open trade Portugal assumed better than England at producing everything Argued that England would still benefit from free trade The Model
Free Trade and Specialisation • Ricardo’s “Comparative Advantage” – Took case Mercantilists argued would mean rival (Portugal) would “defeat” England in open trade • Portugal assumed better than England at producing everything • Argued that England would still benefit from free trade – The Model:
Free Trade and specialisation Two countries producing 2 commodities Assume Portugal Absolutely more efficient at producing both wine and cloth Relatively more efficient at producing wine than cloth More of both wine and cloth produced if England specialises in cloth Portugal specialises in wine Countries trade surpluses and increase consumption of both goods in both countries
Free Trade and Specialisation • Two countries producing 2 commodities • Assume Portugal – Absolutely more efficient at producing both wine and cloth – Relatively more efficient at producing wine than cloth • More of both wine and cloth produced if – England specialises in cloth – Portugal specialises in wine • Countries trade surpluses and increase consumption of both goods in both countries
Comparative Advantage Portugal (per 1000 men) 90 men to produce x units of cloth 80 men to produce y units of wine can produce 11.1 units of cloth; or 12.5 units of wine; or any"straight line"combination of the two England(per 1000 men) 100 men to produce x units of cloth 120 men to produce y units of wine can produce 10 units cloth, 8.5 units of wine or any linear combination:
Comparative Advantage • Portugal (per 1000 men) – 90 men to produce x units of cloth – 80 men to produce y units of wine – can produce • 11.1 units of cloth; or • 12.5 units of wine; or • any “straight line” combination of the two • England (per 1000 men) – 100 men to produce x units of cloth – 120 men to produce y units of wine – can produce 10 units cloth, 8.5 units of wine, or any linear combination: