Ricardo s Model of Trade Portugal can produce all the cloth it needs with 90 laborers and all the wine it needs with 90 laborers Britain can produce equivalent amounts of cloth with 100 laborers and equivalent amounts of wine with 110 laborers Can Portugal benefit from trading with Britain Yes If they put all their labor into wine and traded the surplus to Britain for cloth They could obtain more cloth than they could produce on their own Portugal has an absolute advantage they can produce booth goods more cheaply efficiently than the other country But a country will gain from trade as long as it has a comparative advantage in at least one good it can produce that good more cheaply efficiently than other goods If every country specializes in the goods where it has a comparative advantage and trades for everything else the total amount of goods produced in the world will be higher than if every country was self sufficient Ricardo Weiner Stolper Samuelson Theorem trade benefits a country as a whole but within the country benefits go disproportionately to workers in industries w comparative advantage while workers in other industries may be made worse off May not be compatible with incentives to improve technology What if too many countries have the same comparative advantage Criticisms of Ricardo s Models Winners and Losers of Trade Winners o Winners owners in areas of comparative advantage o Consumers prices lower more choices o Investors more opportunities including in areas with better opportunity for growth o Government bigger tax base Losers o Workers owners in areas of comparative disadvantage o People located geographically near industries at competitive disadvantage ripple effects o In some cases environmental protection o In some cases labor protection The Economic North and South Most of the wealthiest states are in the northern hemisphere Developing states tend to be south of them Since Cold War North South gap has often replaced East West as the strongest division in world politics Other Facts 80 of world lives on less than 10 a day The richest 20 account for 75 of global income 76 of consumption Roughly 1 billion people are illiterate 2 6 billion lack basic sanitation Nearly half of all children in the world live in poverty 1 6 billion people have no electricity In 1820 the wealth of the richest countries outnumbered the wealth of the poorest by 3 to 1 Today it is 72 to 1 790 million people are consistently undernourished Everyone on Earth could be provided with clean water for 9 billion roughly the amount the US spends on cosmetics each year Explanations for the Gap Colonial Legacies Economies in South historically designed to extract resources grow crops and send them back to Europe for refinement This arrangement largely persists today South dependent on other states for finished goods Finished goods generally much more expensive than raw goods Raw goods often fluctuate wildly in price Explanations for the Gap Political Institutions Little incentive to work hard or invest if policies are bad Examples o High taxes and revenues aren t returned back into economy o Government seizes private property o Private property destroyed in civil war or protests Institutions that extract wealth from population associated with lower growth Explanations for the Gap Geography Highest levels of development occur in areas suited to large scale agricultures allows for specialization and trade within society o Eurasia historically best region for grain and livestock Tropical climates support wider variety of diseases Many of the poorest countries today are landlocked Explanation for the Gap Modernization Theory At various times empires in Middle East North Africa China India Central America were more advanced than Europe The West just happened to be at leading edge of current wave of development The rest of the world is just at an earlier stage in the same process Explanations for the Gap Trade Money and Debt When developing countries import goods they usually have to pay in the currency of the exporter Need to export enough to that country to get enough currency to Otherwise must borrow to pay for it Leads to a vicious circle as some money must be diverted to paying pay for the imports off loans