J.S. Mill developed Ricardo's theory of comparative costs by introducing the concept of reciprocal demand. Reciprocal demand refers to the intensity of demand one country has for another country's exports. Mill argued that terms of trade are determined by the relative strength and elasticity of reciprocal demand between countries, as represented by their offer curves. While pioneering, Mill's theory makes unrealistic assumptions and neglects supply-side factors, leading some economists to criticize it as an imperfect framework for analyzing international trade.
The document summarizes the Heckscher-Ohlin (H-O) theory of international trade. The H-O theory states that countries will export goods that use their abundant and cheap factors of production intensively and import goods that use their scarce factors intensively. It assumes countries differ in their endowments of capital and labor. The theory shows that capital-abundant countries will export and produce capital-intensive goods, while labor-abundant countries will export and produce labor-intensive goods. The theory represents an improvement over previous theories in explaining the basis of trade between countries within a general equilibrium framework.
The document summarizes the relative income hypothesis proposed by Dusenberry in 1949. The key points are:
1) Dusenberry argued that consumption depends more on a person's relative income position compared to others in their community, rather than their absolute income level. People will consume more if they live in wealthier communities to maintain their standard of living.
2) In the short run, the average propensity to consume is greater than the marginal propensity to consume and the relationship between income and consumption is not proportional. In the long run, consumption increases proportionally with income and the average propensity to consume equals the marginal propensity to consume.
3) Dusenberry also believed consumption
An offer curve shows the quantities of imports and exports that a country is willing to trade at different relative prices (terms-of-trade). It combines a country's demand for imports and supply of exports. Offer curves can be drawn for two countries trading two goods to determine the trading equilibrium and equilibrium terms-of-trade. The equilibrium occurs where the quantities exported and imported are equal for both goods and countries.
The document discusses key concepts related to consumption functions, including:
1) Consumption depends mainly on current income but is also influenced by other factors like interest rates and wealth. As income rises, consumption increases at a lower rate due to savings.
2) Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) measure the relationship between consumption and income. APC is the ratio of total consumption to total income, while MPC is the change in consumption over a change in income.
3) Effective demand, the combination of consumption and investment demand, must remain high to maintain employment levels. Investment demand depends on the marginal efficiency of capital (MEC).
Tobin's q theory is a ratio that compares the market value of a company to the replacement cost of its assets. A ratio below 1 implies the stock is undervalued, while above 1 means it is overvalued. This ratio is used to inform investment decisions. It is calculated by dividing a firm's market value by the book value of its assets. While Tobin's q theory was shown to predict investment in 1960-1974, later data showed the ratio and investment diverging, calling into question how accurately it forecasts capital expenditures.
Adam Smith first proposed the theory of absolute advantage in his 1776 publication "An Inquiry into the Nature and Causes of the Wealth of Nations" as a rebuttal to mercantilism. The theory argues that countries should specialize in and export goods they can produce at a lower relative cost than other nations, and import goods that other nations can produce at a lower cost, resulting in more global production and wealth overall. An example shows that France has an absolute advantage in wine production while Japan has an advantage in clock and radio production based on their differing labor outputs.
The document summarizes the Heckscher-Ohlin (H-O) theory of international trade. The H-O theory states that countries will export goods that use their abundant and cheap factors of production intensively and import goods that use their scarce factors intensively. It assumes countries differ in their endowments of capital and labor. The theory shows that capital-abundant countries will export and produce capital-intensive goods, while labor-abundant countries will export and produce labor-intensive goods. The theory represents an improvement over previous theories in explaining the basis of trade between countries within a general equilibrium framework.
The document summarizes the relative income hypothesis proposed by Dusenberry in 1949. The key points are:
1) Dusenberry argued that consumption depends more on a person's relative income position compared to others in their community, rather than their absolute income level. People will consume more if they live in wealthier communities to maintain their standard of living.
2) In the short run, the average propensity to consume is greater than the marginal propensity to consume and the relationship between income and consumption is not proportional. In the long run, consumption increases proportionally with income and the average propensity to consume equals the marginal propensity to consume.
3) Dusenberry also believed consumption
An offer curve shows the quantities of imports and exports that a country is willing to trade at different relative prices (terms-of-trade). It combines a country's demand for imports and supply of exports. Offer curves can be drawn for two countries trading two goods to determine the trading equilibrium and equilibrium terms-of-trade. The equilibrium occurs where the quantities exported and imported are equal for both goods and countries.
The document discusses key concepts related to consumption functions, including:
1) Consumption depends mainly on current income but is also influenced by other factors like interest rates and wealth. As income rises, consumption increases at a lower rate due to savings.
2) Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC) measure the relationship between consumption and income. APC is the ratio of total consumption to total income, while MPC is the change in consumption over a change in income.
3) Effective demand, the combination of consumption and investment demand, must remain high to maintain employment levels. Investment demand depends on the marginal efficiency of capital (MEC).
Tobin's q theory is a ratio that compares the market value of a company to the replacement cost of its assets. A ratio below 1 implies the stock is undervalued, while above 1 means it is overvalued. This ratio is used to inform investment decisions. It is calculated by dividing a firm's market value by the book value of its assets. While Tobin's q theory was shown to predict investment in 1960-1974, later data showed the ratio and investment diverging, calling into question how accurately it forecasts capital expenditures.
Adam Smith first proposed the theory of absolute advantage in his 1776 publication "An Inquiry into the Nature and Causes of the Wealth of Nations" as a rebuttal to mercantilism. The theory argues that countries should specialize in and export goods they can produce at a lower relative cost than other nations, and import goods that other nations can produce at a lower cost, resulting in more global production and wealth overall. An example shows that France has an absolute advantage in wine production while Japan has an advantage in clock and radio production based on their differing labor outputs.
The gains from international trade depend on a country's terms of trade, which is the ratio of export prices to import prices. There are three main types of terms of trade: 1) Net barter terms of trade, which is the ratio of export price index to import price index; 2) Gross barter terms of trade, which is an index of import quantities to export quantities; 3) Income terms of trade, which is the net barter terms multiplied by the export volume index. The terms of trade can be influenced by factors like the elasticity of demand, nature of supply and production, size of the country, population size, exchange rates, and trade policies.
Don Patinkin criticized the neoclassical assumptions of homogeneity and dichotomization. He proposed the real balance effect to reconcile goods and money markets. The real balance effect posits that changes in the price level affect real purchasing power, which impacts demand for goods. When prices rise, real balances and goods demand fall, pushing prices back down. This feedback loop between prices, real balances, and goods demand is represented using the IS-LM model, where a fall in prices shifts the LM curve right, raising output and employment until full employment is reached. Patinkin argues this real balance effect denies the homogeneity assumption and integrates goods and money markets.
This document discusses the balance of payments theory of exchange rates. It argues that the exchange rate is determined by the demand and supply of a country's currency, which is influenced by the balance of payments. A deficit leads to a falling exchange rate as demand exceeds supply, while a surplus increases demand for the home currency and causes an appreciation. The theory uses demand and supply curves to show how the equilibrium exchange rate is reached when quantities demanded and supplied are equal. It has merits in providing an equilibrium analysis, but also criticisms around its assumptions and indeterminacy.
The theory of Technical dualism is one of the theories of dualism. Professor Higgins has developed the theory of Technological Dualism. By this, he means: "The use of different production functions in the advance sector and in the traditional sectors of UDCs".
Consumption function shows the relationship between consumption and income. Keynes proposed the psychological law of consumption, which states that as income rises, consumption increases but by less than the rise in income. Consumption depends on both subjective psychological factors and objective external factors. The average propensity to consume is the ratio of consumption to income, while the marginal propensity to consume is the change in consumption from a change in income.
R.G. Hawtrey viewed business cycles as purely monetary phenomena caused by fluctuations in bank credit and money supply. He argued that expansions are caused when banks lower interest rates and expand credit, stimulating borrowing by traders. This leads to increased production, income, spending and demand in a self-reinforcing cycle. Contractions occur when banks tighten credit due to depleted reserves, raising rates and curbing borrowing. This causes falling demand, income, production, prices and profits in a deflationary spiral. Hawtrey saw uncontrolled credit as the root cause of instability, and argued that controlling credit would regulate economic fluctuations.
Hypothesis of secular deterioration of terms of tradeRitika Katoch
The document summarizes the Prebisch-Singer thesis, which argues that terms of trade tend to deteriorate against primary commodities and in favor of manufactured goods over time. It presents the key assumptions of the thesis, including that income elasticity of demand is greater for manufactured goods than primary products. As a result, as incomes rise in developed countries, demand shifts away from primary commodities exported by developing countries towards manufactured goods produced in developed nations. This leads to a long-term decline in terms of trade for developing country exports.
Meeting 3 - Rybczynski theorem (International Economics)Albina Gaisina
The document discusses several economic concepts:
1) The Rybczynski theorem explains that if a country's supply of one factor increases, it will produce more of the good that intensively uses that factor and less of the other good.
2) Dutch disease refers to an economic phenomenon where resource discovery leads to decline of other sectors through currency appreciation and a shift in economic activity.
3) The resource curse or paradox of plenty suggests that countries with an abundance of natural resources tend to have less economic growth and worse development outcomes than countries with fewer natural resources, due to issues like overdependence on commodity exports and weak institutions.
David Ricardo originated the theory of comparative cost advantage in his 1817 book. The theory states that countries will export goods that they have a lower relative production cost in and import goods with higher relative costs, even if one country may have an absolute cost advantage in all goods. The theory assumes two countries and goods, homogeneous and mobile factors of labor, no transportation or trade barriers, and constant returns to scale. England has a lower relative cost (cost advantage) in cloth and Portugal has a lower cost in wine, so each country specializes and gains from trade by exporting their lower cost good and importing the other good. However, the theory makes unrealistic assumptions and does not consider all real-world complexities of international trade.
Business cycles show periodic fluctuations in economic activity, measured by indicators like production, employment, and income. There are four phases of a business cycle: expansion, peak, contraction/recession, and trough. Expansions involve growth while contractions involve declines. Business cycles are caused by factors like changes in investment levels, consumer and business expectations, and technological innovations. Theories like Keynes' emphasize how fluctuations in investment can drive cycles, while real business cycle theory sees cycles arising from supply-side shocks. Cycles affect the economy through impacts on areas like growth, inflation, and unemployment. Policy tools can help control the amplitude of cycles.
The document discusses the accelerator theory of investment. It explains that the accelerator principle states that an increase in a firm's output will require a proportional increase in its capital stock. The accelerator coefficient (v) represents the ratio of induced investment to an initial change in consumption. The naive accelerator model holds that net investment (Int) is equal to v multiplied by the change in output (ΔYt). Refinements to the simple accelerator model include allowing for asymmetrical reactions to increases and decreases in output, and assuming variable rather than fixed technical coefficients of production.
Patinkin argues that the classical dichotomy between real and monetary sectors is invalid. When the money supply changes, it affects relative prices through the real balance effect. Specifically:
1) If money supply increases, prices rise proportionally. This reduces the real value of cash balances and lowers demand for goods, putting downward pressure on prices.
2) The real balance effect restores equilibrium by linking demand for goods and money - if prices fall, real balances and demand for goods rise, putting upward pressure back on prices.
3) Therefore, changes in the money supply can change the price level without affecting relative prices, reconciling monetary and real factors and invalidating the dichotomy between the two.
This document discusses tariffs and their economic effects. It defines tariffs as taxes on imports and describes different types of tariffs such as ad valorem and specific tariffs. The document then analyzes the consumption, production, trade, and revenue effects of imposing a tariff using a partial equilibrium model. It also discusses the impact of tariffs on consumer and producer surplus. Finally, it provides an example comparing the effects of a tariff versus an import quota.
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
Factor endowments and the heckscher ohlin theory (chapter 5)Rasel Ahamed
This document presents a group presentation to Professor Ayesha Akhter of the Department of Finance at Jagannath University by Group 4. The presentation includes:
1. An introduction and list of group members and their student IDs.
2. An outline of Chapter 5 on the Heckscher-Ohlin theory of international trade, including assumptions, factor intensities, factor abundance, and the shape of production frontiers.
3. Summaries of sections on the Heckscher-Ohlin theory, factor price equalization, and illustrations of the models by various group members.
This document discusses business and trade cycles. It provides three main theories for the causes of trade cycles:
1. Schumpeter's innovation theory which argues that business cycles are caused by periodic bursts of innovation by capitalists. This leads to periods of boom and recession as innovations are adopted.
2. Samuelson's multiplier-accelerator theory which explains how interactions between consumption, investment, and income can cause fluctuations in economic activity through feedback loops.
3. Hicks' theory which views trade cycles as temporary deviations around an economy's steady growth path. It analyzes how increases in autonomous investment can trigger boom-bust cycles through multiplier and accelerator effects.
All three theories attempt to explain the regular patterns of
Mint Parity Theory - History, Definition, Advantages and DisadvantagesSundar B N
The mint parity theory explains how exchange rates between countries on the gold standard were determined. Under this system, currencies were defined by and convertible to a fixed quantity of gold. The exchange rate between two currencies adhering to the gold standard was based on the parity of the mint price of gold in the two countries. This ensured stability in exchange rates as long as countries maintained their commitment to gold convertibility at a fixed price. However, the gold standard broke down in the early 20th century, rendering the mint parity theory obsolete.
This document discusses the gains from international trade. It defines gains from trade as the advantages that countries enjoy through specialization and division of labor when participating in international trade. There are static and dynamic gains. Static gains come from short-term reallocation to comparative advantage sectors, while dynamic gains accumulate over time through factors like increased productivity and investment. Countries can measure gains from trade through approaches looking at reduced production costs, improved terms of trade, and increases in real income. Smaller countries tend to benefit more from trade than larger countries due to greater opportunities for specialization.
The document summarizes David Ricardo's theory of comparative advantage. It explains that according to Ricardo, countries can benefit from trade even if they do not have an absolute advantage in producing goods, as long as they have a comparative advantage in at least one good. This is illustrated using data showing that while England has higher absolute costs of production than Portugal for both wine and cloth, it has a lower relative production cost for cloth, giving it a comparative advantage. International trade allows both countries to specialize in the goods they have a comparative advantage in, increasing total world output.
international trade and balance of payments for 2nd semester economics for BBAginish9841502661
This document discusses international trade and the gains from trade according to comparative advantage theory. It provides evidence that countries who liberalized trade grew faster than those who did not. While comparative advantage theory predicts patterns of trade well, it oversimplifies specialization and does not account for differences in resources or economies of scale between countries. The model also ignores potential negative impacts of trade like income distribution effects.
This document provides an overview of various trade theories:
1. It begins with explaining mercantilism theory, which held that a country's power depended on its wealth and advocated increasing exports and restricting imports.
2. It then discusses absolute advantage theory and comparative advantage theory, which argue that countries should specialize in producing goods where they have a relative cost advantage and trade for other goods.
3. Factor endowment theory and Hecksher-Ohlin theory posit that countries will export goods that intensively use their abundant and cheap domestic factors of production.
4. More recent theories discussed include product life cycle theory, new trade theory, and Porter's diamond model, which analyze factors like technology,
The gains from international trade depend on a country's terms of trade, which is the ratio of export prices to import prices. There are three main types of terms of trade: 1) Net barter terms of trade, which is the ratio of export price index to import price index; 2) Gross barter terms of trade, which is an index of import quantities to export quantities; 3) Income terms of trade, which is the net barter terms multiplied by the export volume index. The terms of trade can be influenced by factors like the elasticity of demand, nature of supply and production, size of the country, population size, exchange rates, and trade policies.
Don Patinkin criticized the neoclassical assumptions of homogeneity and dichotomization. He proposed the real balance effect to reconcile goods and money markets. The real balance effect posits that changes in the price level affect real purchasing power, which impacts demand for goods. When prices rise, real balances and goods demand fall, pushing prices back down. This feedback loop between prices, real balances, and goods demand is represented using the IS-LM model, where a fall in prices shifts the LM curve right, raising output and employment until full employment is reached. Patinkin argues this real balance effect denies the homogeneity assumption and integrates goods and money markets.
This document discusses the balance of payments theory of exchange rates. It argues that the exchange rate is determined by the demand and supply of a country's currency, which is influenced by the balance of payments. A deficit leads to a falling exchange rate as demand exceeds supply, while a surplus increases demand for the home currency and causes an appreciation. The theory uses demand and supply curves to show how the equilibrium exchange rate is reached when quantities demanded and supplied are equal. It has merits in providing an equilibrium analysis, but also criticisms around its assumptions and indeterminacy.
The theory of Technical dualism is one of the theories of dualism. Professor Higgins has developed the theory of Technological Dualism. By this, he means: "The use of different production functions in the advance sector and in the traditional sectors of UDCs".
Consumption function shows the relationship between consumption and income. Keynes proposed the psychological law of consumption, which states that as income rises, consumption increases but by less than the rise in income. Consumption depends on both subjective psychological factors and objective external factors. The average propensity to consume is the ratio of consumption to income, while the marginal propensity to consume is the change in consumption from a change in income.
R.G. Hawtrey viewed business cycles as purely monetary phenomena caused by fluctuations in bank credit and money supply. He argued that expansions are caused when banks lower interest rates and expand credit, stimulating borrowing by traders. This leads to increased production, income, spending and demand in a self-reinforcing cycle. Contractions occur when banks tighten credit due to depleted reserves, raising rates and curbing borrowing. This causes falling demand, income, production, prices and profits in a deflationary spiral. Hawtrey saw uncontrolled credit as the root cause of instability, and argued that controlling credit would regulate economic fluctuations.
Hypothesis of secular deterioration of terms of tradeRitika Katoch
The document summarizes the Prebisch-Singer thesis, which argues that terms of trade tend to deteriorate against primary commodities and in favor of manufactured goods over time. It presents the key assumptions of the thesis, including that income elasticity of demand is greater for manufactured goods than primary products. As a result, as incomes rise in developed countries, demand shifts away from primary commodities exported by developing countries towards manufactured goods produced in developed nations. This leads to a long-term decline in terms of trade for developing country exports.
Meeting 3 - Rybczynski theorem (International Economics)Albina Gaisina
The document discusses several economic concepts:
1) The Rybczynski theorem explains that if a country's supply of one factor increases, it will produce more of the good that intensively uses that factor and less of the other good.
2) Dutch disease refers to an economic phenomenon where resource discovery leads to decline of other sectors through currency appreciation and a shift in economic activity.
3) The resource curse or paradox of plenty suggests that countries with an abundance of natural resources tend to have less economic growth and worse development outcomes than countries with fewer natural resources, due to issues like overdependence on commodity exports and weak institutions.
David Ricardo originated the theory of comparative cost advantage in his 1817 book. The theory states that countries will export goods that they have a lower relative production cost in and import goods with higher relative costs, even if one country may have an absolute cost advantage in all goods. The theory assumes two countries and goods, homogeneous and mobile factors of labor, no transportation or trade barriers, and constant returns to scale. England has a lower relative cost (cost advantage) in cloth and Portugal has a lower cost in wine, so each country specializes and gains from trade by exporting their lower cost good and importing the other good. However, the theory makes unrealistic assumptions and does not consider all real-world complexities of international trade.
Business cycles show periodic fluctuations in economic activity, measured by indicators like production, employment, and income. There are four phases of a business cycle: expansion, peak, contraction/recession, and trough. Expansions involve growth while contractions involve declines. Business cycles are caused by factors like changes in investment levels, consumer and business expectations, and technological innovations. Theories like Keynes' emphasize how fluctuations in investment can drive cycles, while real business cycle theory sees cycles arising from supply-side shocks. Cycles affect the economy through impacts on areas like growth, inflation, and unemployment. Policy tools can help control the amplitude of cycles.
The document discusses the accelerator theory of investment. It explains that the accelerator principle states that an increase in a firm's output will require a proportional increase in its capital stock. The accelerator coefficient (v) represents the ratio of induced investment to an initial change in consumption. The naive accelerator model holds that net investment (Int) is equal to v multiplied by the change in output (ΔYt). Refinements to the simple accelerator model include allowing for asymmetrical reactions to increases and decreases in output, and assuming variable rather than fixed technical coefficients of production.
Patinkin argues that the classical dichotomy between real and monetary sectors is invalid. When the money supply changes, it affects relative prices through the real balance effect. Specifically:
1) If money supply increases, prices rise proportionally. This reduces the real value of cash balances and lowers demand for goods, putting downward pressure on prices.
2) The real balance effect restores equilibrium by linking demand for goods and money - if prices fall, real balances and demand for goods rise, putting upward pressure back on prices.
3) Therefore, changes in the money supply can change the price level without affecting relative prices, reconciling monetary and real factors and invalidating the dichotomy between the two.
This document discusses tariffs and their economic effects. It defines tariffs as taxes on imports and describes different types of tariffs such as ad valorem and specific tariffs. The document then analyzes the consumption, production, trade, and revenue effects of imposing a tariff using a partial equilibrium model. It also discusses the impact of tariffs on consumer and producer surplus. Finally, it provides an example comparing the effects of a tariff versus an import quota.
In economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied.
The economists Richard Lipsey and Kelvin Lancaster showed in 1956, that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would otherwise be optimal.
Politically, the theory implies that if it is infeasible to remove a particular market distortion, introducing a second (or more) market distortion may partially counteract the first, and lead to a more efficient outcome.
Factor endowments and the heckscher ohlin theory (chapter 5)Rasel Ahamed
This document presents a group presentation to Professor Ayesha Akhter of the Department of Finance at Jagannath University by Group 4. The presentation includes:
1. An introduction and list of group members and their student IDs.
2. An outline of Chapter 5 on the Heckscher-Ohlin theory of international trade, including assumptions, factor intensities, factor abundance, and the shape of production frontiers.
3. Summaries of sections on the Heckscher-Ohlin theory, factor price equalization, and illustrations of the models by various group members.
This document discusses business and trade cycles. It provides three main theories for the causes of trade cycles:
1. Schumpeter's innovation theory which argues that business cycles are caused by periodic bursts of innovation by capitalists. This leads to periods of boom and recession as innovations are adopted.
2. Samuelson's multiplier-accelerator theory which explains how interactions between consumption, investment, and income can cause fluctuations in economic activity through feedback loops.
3. Hicks' theory which views trade cycles as temporary deviations around an economy's steady growth path. It analyzes how increases in autonomous investment can trigger boom-bust cycles through multiplier and accelerator effects.
All three theories attempt to explain the regular patterns of
Mint Parity Theory - History, Definition, Advantages and DisadvantagesSundar B N
The mint parity theory explains how exchange rates between countries on the gold standard were determined. Under this system, currencies were defined by and convertible to a fixed quantity of gold. The exchange rate between two currencies adhering to the gold standard was based on the parity of the mint price of gold in the two countries. This ensured stability in exchange rates as long as countries maintained their commitment to gold convertibility at a fixed price. However, the gold standard broke down in the early 20th century, rendering the mint parity theory obsolete.
This document discusses the gains from international trade. It defines gains from trade as the advantages that countries enjoy through specialization and division of labor when participating in international trade. There are static and dynamic gains. Static gains come from short-term reallocation to comparative advantage sectors, while dynamic gains accumulate over time through factors like increased productivity and investment. Countries can measure gains from trade through approaches looking at reduced production costs, improved terms of trade, and increases in real income. Smaller countries tend to benefit more from trade than larger countries due to greater opportunities for specialization.
The document summarizes David Ricardo's theory of comparative advantage. It explains that according to Ricardo, countries can benefit from trade even if they do not have an absolute advantage in producing goods, as long as they have a comparative advantage in at least one good. This is illustrated using data showing that while England has higher absolute costs of production than Portugal for both wine and cloth, it has a lower relative production cost for cloth, giving it a comparative advantage. International trade allows both countries to specialize in the goods they have a comparative advantage in, increasing total world output.
international trade and balance of payments for 2nd semester economics for BBAginish9841502661
This document discusses international trade and the gains from trade according to comparative advantage theory. It provides evidence that countries who liberalized trade grew faster than those who did not. While comparative advantage theory predicts patterns of trade well, it oversimplifies specialization and does not account for differences in resources or economies of scale between countries. The model also ignores potential negative impacts of trade like income distribution effects.
This document provides an overview of various trade theories:
1. It begins with explaining mercantilism theory, which held that a country's power depended on its wealth and advocated increasing exports and restricting imports.
2. It then discusses absolute advantage theory and comparative advantage theory, which argue that countries should specialize in producing goods where they have a relative cost advantage and trade for other goods.
3. Factor endowment theory and Hecksher-Ohlin theory posit that countries will export goods that intensively use their abundant and cheap domestic factors of production.
4. More recent theories discussed include product life cycle theory, new trade theory, and Porter's diamond model, which analyze factors like technology,
This document discusses international trade and balance of payments. It provides arguments for and against trade liberalization. Supporters argue that trade increases specialization and economies of scale, bringing innovation and competition. Studies show countries that liberalized trade grew faster. However, critics argue that trade can displace domestic workers and increase inequality. The document also examines the Ricardian model of comparative advantage and its limitations in making unrealistic predictions. It defines key concepts like terms of trade, protectionism, and balance of payments accounting.
This document discusses the theory of comparative advantage. It provides background on the theory, which was first described by Robert Torrens in 1815 and later formalized by David Ricardo. Ricardo used a numerical example to show that even if one country has an absolute advantage in all goods, both countries can still benefit from trade based on their comparative advantages. The document also outlines Ricardo's assumptions, provides his numerical example comparing Kenya and Ethiopia, and discusses limitations of the theory.
This document discusses international trade theory and history. It begins with an overview of key concepts in international trade like trade, trade policy, and trade agreements. It then covers the history of international trade from ancient times through modern trade agreements like the GATT. The document also summarizes theories of international trade like mercantilism, absolute advantage, comparative advantage, and factor endowment theories. It provides examples to illustrate comparative advantage and factor endowment theories.
Economics-Theories of International Trade.Chhavi Sharma
This document summarizes several theories of international trade, including:
- Mercantilism, which held that nations should maximize exports and minimize imports to accumulate wealth. Jean-Baptiste Colbert was a prominent proponent.
- Adam Smith's theory of absolute advantage, which argued nations should specialize in what they produce most efficiently and trade.
- David Ricardo's theory of comparative advantage, which showed that free trade benefits all nations by allowing them to specialize according to their relative costs of production.
- The Heckscher-Ohlin theorem, which posits that countries will export goods that intensively use their abundant and cheaply available factors of production.
its one of the topic in agricultural trade and policy that explains how domestic producers, consumer benefit from international trade as well as its effect on national and international welfare
This document provides an overview of international trade theory. It defines international trade and outlines several theories for why nations trade, including mercantilism, absolute advantage, comparative advantage, and factor endowment theory. It also discusses the international product life cycle theory and how trade barriers can impact trade between nations. The document contrasts the theories of absolute and comparative advantage using examples and analyzes different considerations in international trade such as government regulation and consumer tastes.
In this presentation, we will discuss about how or what conditions trigger international trade, which are further elaborated through various theories of international trade.
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The document discusses international trade, providing 5 reasons why trade occurs between countries: differences in technology, resource endowments, demand, economies of scale in production, and government policies. It also discusses Tunisia's balance of trade, exports/imports by category and country, terms of trade, and the relationship between foreign trade and national income. Several trade models are outlined, including absolute advantage, Ricardian, Heckscher-Ohlin, new trade theory, and the gravity model.
There are three principal differences between how economists and noneconomists view international trade: 1) Economists see all forms of trade as equally advantageous, while noneconomists favor trading within one's own group. 2) Economists believe imports and exports are both good for the economy, while noneconomists favor exports. 3) Economists believe a country's trade balance depends on many factors like savings and investment, while noneconomists focus on competitiveness. Economists view trade as increasing efficiency through specialization and comparative advantage, while noneconomists emphasize tribal rivalries.
This document discusses international trade theory, including:
1) It outlines two basic questions in international trade - what determines trade and why countries gain from trade.
2) It describes the historical development of trade theory from mercantilism to absolute advantage and comparative advantage.
3) It provides examples to illustrate comparative advantage theory and opportunity cost, showing how countries can benefit from specializing in and trading goods they have a comparative lower cost of production in.
RICARDO-1.ppt it tells information theoryHoneyiaSipra
1) Adam Smith introduced the concept of absolute advantage, where countries should trade based on which goods they can produce more efficiently.
2) David Ricardo later developed the theory of comparative advantage, showing that even if one country is less efficient overall, both countries can still benefit from trade by each specializing in what they have a comparative rather than absolute advantage in producing.
3) Ricardo's theory assumes two countries and two goods, constant costs, and labor as the only factor of production. It demonstrates that when countries specialize according to their comparative advantages, global production is maximized.
Adam Smith first proposed that absolute advantage in production provides the basis for mutually beneficial trade. David Ricardo later refined this to show that comparative advantage, not absolute advantage, is the key - a country should specialize in what it can produce relatively more efficiently. Empirical studies have supported Ricardo's theory, finding nations export more of goods where they have lower relative production costs. While useful, Ricardo's model does not fully explain differences in productivity or trade's impact on factor incomes.
The document discusses several theories for why trade increases with GNP and the circumstances under which this relationship could break down. It summarizes theories of absolute advantage put forth by Adam Smith, comparative advantage by David Ricardo, and the Heckscher-Ohlin theory that differences in countries' endowments of factors of production like resources can lead to gains from trade. It also notes that technical innovation and differences in consumer tastes across countries can be important drivers of certain types of trade.
This document provides an overview of several trade theories:
1. Mercantilism theory held that a country's wealth depended on exports exceeding imports to gain precious metals. It advocated government control to gain at others' expense.
2. Absolute advantage theory stated countries should specialize in what they produce most efficiently. Comparative advantage theory argued specialization benefits all, even without absolute advantage.
3. Factor endowment theory linked comparative advantage to abundant resources. Heckscher-Ohlin and Leontief paradox theories refined this based on capital and labor.
4. Other theories examined included product life cycles, Porter's diamond model of competitive advantage, and new trade theory focusing on increasing returns to scale.
This document provides an overview of international trade theory. It defines international trade as the exchange of goods and services between countries. The key theories discussed include absolute advantage, comparative advantage, and the Heckscher-Ohlin theory. The document explains that trade theory aims to understand why nations trade and the benefits they gain from specialization and trade. It argues that restrictions on trade are generally harmful to economies.
- Mercantilism was an early theory of international trade that emerged in 16th century England. It held that gold/silver were the main sources of national wealth and that countries should aim to maximize exports and minimize imports to accumulate these precious metals.
- David Hume later criticized mercantilism in 1752, arguing that persistent trade surpluses were unsustainable as they would cause price changes that incentivize shifts in trade flows over time.
- Adam Smith further developed theories of absolute and comparative advantage, arguing that free trade allows countries to specialize according to their efficiencies and all nations can benefit through specialization and exchange.
Alfred Marshall was a prominent British economist in the late 19th and early 20th centuries. He made important contributions to microeconomics and developed the concept of supply and demand equilibrium. Marshall argued that international trade is determined by both supply and demand between two countries. He used a hypothetical trade example between Germany and England to illustrate how price adjustments can bring supply and demand into equilibrium. Later economists like Edgeworth built on Marshall's work, deriving international supply and demand curves from ordinary demand curves. Marshall helped establish economics as a serious academic discipline and developed analytical tools still used today.
This document provides an overview of various international trade theories, including:
- Mercantilism, which holds that a positive trade balance increases a nation's wealth and advocates government intervention to encourage exports and discourage imports.
- Absolute advantage theory, which suggests that countries should produce and export goods they can produce with fewer resources than other nations.
- Comparative advantage theory, which argues that nations can benefit from trade even if they do not have an absolute advantage, as long as they have a comparative advantage in producing some goods at a lower opportunity cost.
PFMS, India's Public Financial Management System, revolutionizes fund tracking and distribution, ensuring transparency and efficiency. It enables real-time monitoring, direct benefit transfers, and comprehensive reporting, significantly improving financial management and reducing fraud across government schemes.
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On June 11-16, several important international events were organized and they are expected
to contribute to Ukraine's resilience and victory: URC2024, the G7 meeting, and the Global
Peace Summit.
According to the IER, real GDP growth slowed slightly to 3.5% yoy in May compared to 4.2%
yoy in April due to significant damage caused by russian attacks on electricity generation.
Restrictions on electricity supply to industry and the population continue: efficient consumption
and the installation of decentralized power generation capacities are a priority.
The Ukrainian Sea Corridor allows an increase in the exports of ores and metallurgical products.
Foreign aid was the lowest in May. However, already in June Ukraine should receive about
USD 4 bn in loans.
In May, as in the previous three months, consumer inflation was slightly above 3% (3.3% yoy).
In June, the NBU again reduced the discount rate – from 13.5% to 13% per annum.
The hryvnia exchange rate has surpassed UAH 40 per dollar due to the growing demand for
cash currency.
The IER is preparing the pub
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June 20, 2024
CRYPTOCURRENCY: REVOLUTIONIZING THE FINANCIAL LANDSCAPE AND SHAPING THE FUTURE
Cryptocurrency: Revolutionizing the Financial Landscape and Shaping the Future
Cryptocurrency, a digital or virtual form of currency that uses cryptography for security, has revolutionized the financial landscape. Originating with Bitcoin's inception in 2009 by the pseudonymous Satoshi Nakamoto, cryptocurrencies have grown from niche curiosities to mainstream financial instruments, reshaping how we think about money, transactions, and the global economy.
#### The Genesis of Cryptocurrency
The birth of Bitcoin marked the beginning of the cryptocurrency era. Unlike traditional currencies issued by governments and controlled by central banks, Bitcoin operates on a decentralized network using blockchain technology. This technology ensures transparency, security, and immutability of transactions, fundamentally challenging the centralized financial systems that have dominated for centuries.
Bitcoin was conceived as a peer-to-peer electronic cash system, aimed at providing an alternative to the traditional banking system plagued by inefficiencies, high fees, and lack of transparency. The underlying blockchain technology, a distributed ledger maintained by a network of nodes, ensures that every transaction is recorded and cannot be altered, thus providing a secure and transparent financial system.
#### The Proliferation of Altcoins
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2. WHY THIS THEORY
Comparative cost difference between the countries
sets the outer limits between which international
trade can take place profitably.
It does not tell where, between the limits,
international trade will actually take place. Mill
provides answer to this question.
J.S.Mill made Ricardo’s theory of comparative cost
determinate by stating the conditions for equilibrium
terms of trade.
Mill provides answer to this question that where,
between the limits, international trade will actually
take place.
3. MILL’S THEORY OF
RECIPROCAL DEMAND:
The Ricardian failure to determine the exact
rate of international exchange between the
two countries was on account of an excessive
emphasis upon the supply aspect and a
complete neglect of demand aspect. It was
J.S. Mill, who attempted to remove this
lacuna in the Ricardian comparative costs
theory.
4. CONTINUE
According to him, the actual ratio at which
commodities are transacted between two countries
depends crucially upon the strength and elasticity
of each country’s demand for the product of the
other or the reciprocal demand. By reciprocal
demand, Mill meant the quantities of exports that
a country would offer at different terms of trade, in
return of varying quantities of imports. In other
words, reciprocal demand refers to the intensity of
demand for the product of one country in the other
country.
5. ASSUMPTIONS
The trade takes place between two countries, A
and B.
trade is in two commodities, X and Y.
In both the countries, the production is
governed by constant return to scale.
The trade between two countries is governed by
the principle of comparative costs.
6. CONTINUE
The pattern of demand is similar in two
countries.
There are perfectly competitive conditions in
the market.
There is no restriction on trade and
government follows a policy of laissez faire.
There is full employment of resources in both
the countries.
7. CONTINUE
There is an absence of transport costs.
The exports of each country are sufficient to
pay for its imports.
Mill has considered that amount of labour is
fixed and different units of goods are produced
with this fixed amount of labour.
Trade is based on comparative advantage
between both countries.
8. OUTPUT PRODUCED WITH FIXED LABOUR
UNITS
Mill’s theory of reciprocal demand can be explained on the basis of Table-
Country Units of Linen Units of Cloth
England 10 10
Germany 6 8
9. SPECIALISATION
On the basis of comparative advantage
England
Specialise in Linen
Export of Linen
Import of Cloth
Germany
Specialise in Cloth
Export of Cloth
Import of Linen
11. GAINS FROM TRADE
On the basis of Domestic TOT
England has to sacrifice 1L for producing 1C
If England has to sacrifice less than 1L by
importing 1C then international trade will be in
favour of England.
Germany can produce only 0.75L by sacrificing 1C
If Germany gets more than 0.75L by
exporting 1C then international trade will be in favour
of Germany.
13. DIAGRAM SHOWS
OA=Domestic TOT of Germany
OB=Domestic TOT of England
OE=England’s offer curve
OG=Germany’s offer curve
AOB area=Area between lines OA & OB(dotted
area)=International trading Area
OR=International TOT line
Shaded area =No trade Zone
14. CRITICISMS TO MILL’S THEORY OF
RECIPROCAL DEMAND:
(i) The theory is based on unrealistic assumptions,
such as perfect competition and full employment.
(ii) Actual trade is not restricted to two country, two
commodity model.
(iii) Mill concentrates on the elasticity of demand,
thus neglecting the impact of elasticity of supply.
According to the modem economists, terms of trade
are generally influenced by- (a) elasticity of demand
for exports, (b) elasticity of demand for imports, (c)
elasticity of supply exports, and (d) elasticity of
supply of imports.
15. CONTINUE
(iv) Graham has criticised the reciprocal demand aspect
of Mill’s theory. It has exaggerated the role of reciprocal
demand and neglected the comparative cost conditions
in determining the terms of trade.
(v) Jacob Viner has criticised the theory as imperfect
and inadequate.
(vi) Shadwell has criticised the theory by saying that in
this theory the exchange ratio is fixed at a point where
the value of imports and exports are in equilibrium as a
mere truism. It does not throw any light on the
determinants of terms of trade.
16. CONCLUSION
The theoretical structure of J.S. Mill’s theory of reciprocal demand
rests upon the foundation of Ricardian principle of comparative
costs.
Consequently, the theoretical assumptions in Mill’s theory are
almost the same as in the Ricardian theory. That makes Mill’s
theory of reciprocal demand susceptible to similar weaknesses as
are found in the Ricardian analysis.
Bastable, however, does not agree with this criticism because Mill’s
theory not only states the equilibrium, but also discusses the forces
that operate to bring it about.
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