Wednesday/ September, 2019

 There are lots of problems with trade ◦ There may be some ways that some governments can make things better by intervening (that is, by not practicing free trade)  But government intervening in free trade is definitely dangerous  Restrictions on trade have  kept some countries very poor  contributed to huge depressions

 A nation’s wealth depends on accumulated “treasure” ◦ Gold and silver are the currency of trade  Mercantilists sought what we now call ‘development’  They argued their countries should run a trade surplus ◦ Maximize export through subsidies ◦ Minimize imports through tariffs and quotas  Flaw: “zero-sum game” ◦ Mercantilists neglected to see the benefits of trade

 They assumed that trade was a zero-sum game  As England, France, and the Netherlands competed with each other, many thought only about advantage for their country But there was a flaw in the mercantilists’ argument

 Adam Smith argued (Wealth of Nations, 1776): Capability of one country to produce more of a product with the same amount of input can vary ◦ A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient  Trade between countries is, therefore, beneficial ◦ Example: Ghana/cocoa vs. South Korea/rice

 As people specialize and seek higher incomes, they may learn to do their specialties better

 Suppose one country is more efficient than another in everything?  There are still global gains to be made if a country specializes in products it produces relatively more efficiently than other products

 David Ricardo (Principles of Political Economy, 1817): ◦ A country should import products for which it is relatively inefficient even if the country is more efficient in the product’s production than country from which it is buying  Trade is a positive-sum game

Theory of Comparative Advantage

 Countries have comparative advantage in goods for which the opportunity cost of production is relatively low ◦ That is, those that can be produced by giving up relatively little in production of other goods

 This means your country has comparative advantage in the product or service where the ratio Resources required in your country. Resources required in the other country is low

Ghana has absolute advantage in both cocoa and rice, but its comparative advantage is in cocoa. Korea has comparative advantage in rice. Cocoa Ghana 3.75 tons Korea 15 tons 20 tons Let Korea specialize in rice – Ghana expands cocoa production to replace all Korean cocoa production lost 15 tons 18 tons Then Ghana can replace all Korean cocoa production and the countries have more of both goods. Rice 10 tons 5 tons

But it would be even poorer if it did not trade The country less efficient in everything will be poor …