the positive economist susan hayes pdst economics conference ‘ international trade’ 2 nd october...
TRANSCRIPT
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The Positive Economist Susan Hayes
PDST Economics Conference
‘International Trade’
2nd October 2010
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What is “ absolute advantage”?
• A situation where a country can produce a good cheaper
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When is the law of Comparative
Advantage Used?
In a case where a country is more efficient than another, in a number of goods, it should specialise in the one where it has the
greatest comparative advantage and trade for its other needs.
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“Comparative Advantage”
situations for your students
• You may have been good at a number of subjects for your Junior Cert, but you pick out your best to study for your Leaving Cert
• You might like many clothes in a shop, but you only pick the number of items that you can afford and that you like best
• On buying a mobile phone, any of them will let you call and text. However, you pick out the one with the most functionality or the cheapest payment options
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In each case, you could study, enjoy or use any of what’s on offer,
but how you pick out the best for YOU?!
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How do we work out quantifiably what a
country is “most efficient” at?
• Calculate who can produce the most outputs in a year!
• Example:
Crepes BodhransIreland 1000 2000
France 500 250
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Who is the most efficient?
• Ireland can make more of both Crepes and Bodhrans than France
• Ireland can make (1000/500) 2 times as many Crepes as France
• Ireland can make (2000/250) 8 times as many Bodhrans as France
• Since 8 > 2 Ireland should specialise in the production of Bodhrans
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Difficulty
• Students find it confusing to group together goods and countries
• Use one colour pen for one country to identify a country and specialised good
• Choose countries with colours and subsequently goods associated with them to aid this process!
• For kinaesthetic students, bring in some things to represent the explanation
• Encourage them to have an example ready to use as illustration in the exam
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Example Continued
• Ireland specialises in Bodhrans
• France specialises in Crepes
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What is the result of Specialisation?
• Each country doubles it’s production of the good that it specialises in!
Crepes Bodhrans
Ireland 4000
France 1000
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Remember!!
• When you took on a lesser number of subjects for
Leaving Cert than for Junior Cert, you could give
more time to those areas.
• The very same logic applies here too...
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What is the result of Specialisation?
• In Ireland, if we chose not to produce crepes, then we could make 2000 extra Bodhrans.
• However, if France decided not to produce any more crepes, they could only produce an extra 250 Bodhrans.
• Which is the bigger number – 2000 or 250?
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As a result…….
.
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Free Trade
– Customs duties
– Quotas
– Other Restrictions
– (Differences between EU and Non-EU countries)
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No Transport
Costs
• No Transport Costs
– Ireland is only connected by sea and air to the rest of the
world
– May impact (or eradicate) comparative advantage
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Factors of Production are
Mobile
• Factors of Production are Mobile
– Costs and stumbling blocks to immediately stopping and starting
production
• Capital
• Training
• Land
• Machinery
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Constant Returns to
Scale
• Constant Returns to Scale
– Cut production of one good automatically doubles that of
another
– Factors of Production inputs versus Product outputs
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Benefits will Flow Throughout the Economy
• Benefits will Flow Throughout the Economy
– Obsoleteness of factors of production
• Capital
• Training
• Machinery
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What are the sources of Comparative advantage?
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What are the sources of Comparative
Advantage?
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Comparative Advantage &
Terms of Trade
• What is the opportunity cost of a Bodhrans?
• Opportunity Cost = Production of good you want to compare
Base Good Production
• Opportunity Cost = Bodhran Production
Crepe Production
• Ireland’s opportunity cost: 2000/1000 =2
• France’s opportunity costs: 250/500 = 0.5
• One Bodhrans will be exchanged for between 0.5 and 2 units of crepes
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Comparative Advantage &
Terms of Trade
Index of Exports Prices * 100
Index of Import Prices
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What is the trend over a number of
years?
• Calculate the formula for a number of years
• Has the figure moved up or down?
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What would cause the Irish terms of trade
to change?
• A change in the price or volume of a major import (cotton for
clothes in Penny's)
• A change in the price or volume of a major export (tourism in
Ireland)
• A change in the value of the currency (the value of sterling)
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What is the effect of a favorable
movement in the Terms of Trade
• The purchasing power of our exports increase
• If the currency strengthens, our exports become more expensive
• If the prices of imports decrease:– Prices of domestic goods decrease
– (i.e. deflation or lower inflation)
• Foreign goods become more competitive
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Some World Economics
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Some World Economics
• Who holds the coveted position of the second
biggest economy in the world?
– Japan - GDP of $1.28tn
– China - GDP of $1.33tn
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Some World Economics: Germany
• Total unemployment is to drop below 2.8 m• GDP increased by more than 1.5% in Q2• Exports accounted for 41% of German GDP in
2009, compared with 13% in Japan and 11% in the US.
• Since the launch of the euro in 1999, German workers had seen a meagre 12% rise in wages