Based on Chapter 2 Trade and Technology: The Ricardian Model. Provide a brief explanation for certain questions (as noted). Mercantilists believed that a trading country could accumulate gold through: A. Increased exports of goods. A reduction in exports of goods. Increased imports of goods. A trade policy favored by mercantilists. Chapter 2 Labor Productivity and Comparative Advantage: The Ricardian Model Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld.
Learning Objectives. Learn the five reasons why trade between countries may occur.
Recognize that separate models of trade incorporate different motivations for trade.The first theory section of this course develops models that provide different explanations or reasons why trade takes place between countries. The five basic reasons why trade may take place are summarized below. The purpose of each model is to establish a basis for trade and then to use that model to identify the expected effects of trade on prices, profits, incomes, and individual welfare. Reason for Trade #2: Differences in Resource EndowmentsAdvantageous trade can occur between countries if the countries differ in their endowments of resources. Resource endowments refer to the skills and abilities of a country’s workforce, the natural resources available within its borders (minerals, farmland, etc.), and the sophistication of its capital stock (machinery, infrastructure, communications systems).
The basis for trade in both the pure exchange model in and the Heckscher-Ohlin model in is differences in resource endowments. Reason for Trade #3: Differences in DemandAdvantageous trade can occur between countries if demands or preferences differ between countries. Individuals in different countries may have different preferences or demands for various products. For example, the Chinese are likely to demand more rice than Americans, even if consumers face the same price.
Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than Americans would, even if they all faced the same prices. There is no formal trade model with demand differences, although the monopolistic competition model in does include a demand for variety that can be based on differences in tastes between consumers. SummaryThere are very few models of trade that include all five reasons for trade simultaneously. The reason is that such a model is too complicated to work with. Economists simplify the world by choosing a model that generally contains just one reason. This does not mean that economists believe that one reason, or one model, is sufficient to explain all outcomes. Instead, one must try to understand the world by looking at what a collection of different models tells us about the same phenomenon.For example, the Ricardian model of trade, which incorporates differences in technologies between countries, concludes that everyone benefits from trade, whereas the Heckscher-Ohlin model, which incorporates endowment differences, concludes that there will be winners and losers from trade.
Change the basis for trade and you may change the outcomes from trade.In the real world, trade takes place because of a combination of all these different reasons. Each single model provides only a glimpse of some of the effects that might arise. Consequently, we should expect that a combination of the different outcomes that are presented in different models is the true characterization of the real world. Unfortunately, because of this, understanding the complexities of the real world is still more of an art than a science.
DescriptionSolution manual for International Economics, 9th edition by Paul R.