Lecture 3 Comparative Advantage and the Gains from Trade Econ 340News: Jan 11-19 • US Congress fails to approve increased funds for IMF -- FT: 1/14 | CTools – In 2010, led by the US, G20 had agreed that advanced economies would increase the role of emerging economies in IMF and also increase its funding. – The US budget package agreed Jan 13 did not include increased funds for IMF, in spite of intense lobbying by US Treasury and the White House. – This breaks the "contract" that the US had with other countries and will prevent reform that would have made IMF governance fairer for emerging economies. • Indonesia bans mineral exports -- NYT: 1/12 | Proquest | FT: 1/12 | CTools – Indonesia announced a ban on unprocessed mineral exports, effective Jan 12 2014, but not actually binding for major exporters until 2017. Indonesia is a major producer of the world's gold, nickel, copper, tin and thermal coal. It produces more than 15% of global nickel supply. – Purpose is to push mineral companies to process minerals inside Indonesia, increasing the "value added" there. Companies are required to build smelters to convert ore into pure minerals by 2017. – Government claims this will promote industrial development. Mining companies and economists say it will cause mass lay-offs and reduce export revenues. • US Democrats are critical of Trans-Pacific Partnership (TPP) -- WSJ: 1/15 | Proquest | NYT: 1/15 | Proquest – White House wants "fast track" rules for passing trade agreements, but Democrats fear that TPP will reward countries with poor records on human rights and environment. – Documents leaked by WikiLeaks show that the environmental chapter of what is being negotiated looks like US is giving in to the other 11 TPP countries, allowing environmental protections to be not legally binding. – USTR Froman says "We have worked closely with the environmental community from the start and have made our commitment clear." But the other 11 countries argue that strong enforceable environmental rules would hurt their growing economies. Lecture 3: Comp. Advantage 2News: Jan 11-19 • US Congress fails to approve increased funds for IMF – In 2010, led by the US, G20 had agreed that advanced economies would increase the role of emerging economies in IMF and also increase its funding. – The US budget package agreed Jan 13 did not include increased funds for IMF, in spite of intense lobbying by US Treasury and the White House. – This breaks the "contract" that the US had with other countries and will prevent reform that would have made IMF governance fairer for emerging economies. Lecture 3: Comp. Advantage 3News: Jan 11-19 • Indonesia bans mineral exports – Indonesia announced a ban on unprocessed mineral exports, effective Jan 12 2014, but not actually binding for major exporters until 2017. Indonesia is a major producer of the world's gold, nickel, copper, tin and thermal coal. It produces more than 15% of global nickel supply. – Purpose is to push mineral companies to process minerals inside Indonesia, increasing the "value added" there. Companies are required to build smelters to convert ore into pure minerals by 2017. – Government claims this will promote industrial development. Mining companies and economists say it will cause mass lay-offs and reduce export revenues. Lecture 3: Comp. Advantage 4News: Jan 11-19 • US Democrats are critical of Trans-Pacific Partnership (TPP) – White House wants "fast track" rules for passing trade agreements, but Democrats fear that TPP will reward countries with poor records on human rights and environment. – Documents leaked by WikiLeaks show that the environmental chapter of what is being negotiated looks like US is giving in to the other 11 TPP countries, allowing environmental protections to be not legally binding. – USTR Froman says "We have worked closely with the environmental community from the start and have made our commitment clear." But the other 11 countries argue that strong enforceable environmental rules would hurt their growing economies. Lecture 3: Comp. Advantage 5Lecture 3: Comp. Advantage 6 Outline: Comparative Advantage and the Gains from Trade • Why Countries Trade – Price Differences – Supply and Demand – Determinants of Prices • Ricardian Model of Trade – Examples – Wages and Prices in the Ricardian Model – Lessons from the Ricardian Model • Generality of the Gains from Trade • Identifying Comparative Advantage • Critiques of Comparative AdvantageLecture 3: Comp. Advantage 7 Why Countries Trade • Price differences – If prices differ by more than transport costs • Buyers in high-price country will import • Sellers in low-price country will export • Anybody in any country can profit by doing both – Buying in low-price country and – Selling in high-price countryLecture 3: Comp. Advantage 8 Why Countries Trade – Thus, in all cases: imports exports is,that trade: toleadmay BABAPPBA→< € PA< PBwill lead to : trade A → Bif PB− PA> tt = trade costLecture 3: Comp. Advantage 9 Why Countries Trade: Supply and Demand Country B P Q Country A P Q DA DB SB SA PA PB “Autarky” = No trade Autarky price in country A Autarky price in country B PBLecture 3: Comp. Advantage 10 Country B P Q Country A P Q DA DB SB SA PA PB PF Exp Imp Why Countries Trade: Supply and Demand Free Trade = No barriers to trade PF is defined by these two distances being equal.Lecture 3: Comp. Advantage 11 Country B P Q Country A P Q DA DB SB SA PA PB PF Exp Imp a c b d Use areas to measure gains and losses.Lecture 3: Comp. Advantage 12 A’s demanders lose -a Gains and losses from trade: Country B PQCountry A PQDA DB SB SA PA PB PF Exp Imp acbdLoss of Consumer SurplusLecture 3: Comp. Advantage 13 A’s demanders lose -a A’s suppliers gain +(a+b) Gains and losses from trade: Country B PQCountry A PQDA DB SB SA PA PB PF Exp Imp acbdGain of Producer SurplusLecture 3: Comp. Advantage 14 A’s demanders lose -a A’s suppliers gain +(a+b) →Country A gains +b Gains and losses from trade: Country B PQCountry A PQDA DB SB SA PA PB PF Exp Imp acbdLecture 3: Comp. Advantage 15 A’s demanders lose -a A’s suppliers gain +(a+b) Country A gains +b B’s demanders gain +(c+d) Gains and losses
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