Detailed notes of the lecture series "International Trade, Finance and Development" by Prof. Jayati Ghosh at the Jawaharlal Nehru University for the Master's programme in M.A. Global Studies.
- Erik Reinert - The Other Canon Foundation is a center and network for research of heterodox
economics founded by Erik Reinert. The name refers to the founders' message of there being
another economic canon, alternative to the ruling neoclassical economics.
- Reinert, J. Gosh, R. Kattel - Handbook
- Adam Smith - Division of labour (scale enable the division of labour): Criticizes the
mercantilist, source of wealth is your domestic production
- Mercantilism is a national economic policy that is designed to maximize the exports, and
minimize the imports, of a nation (gold inflow, generate wealth) > gold based
- Mercantilism has two core problems that have made it an unreliable form of economic
theory. First, as noted above, mercantilism relies on inherently unfair trade balances and
trade practices. Mercantile nations depend on being able to erect barriers in their own
economies without their trading partners doing the same.
Marx: “You cannot continue to inundate a country with your manufactures unless you enable it to
give you some produce in return”
- The larger the scale of your production, the lower your costs
o export as a vent for surplus
o absolute advantage (better in certain area, export everything that I'm better in
doing) vs comparative advantage
o Assumption: Tastes and preferences (identical/ similar), technology, differential
resources, size of market → full employment assumption,
Smith argued that you should have interest in strategic industries: shipping
- Karl Ludwig, Antonio Sera
o Pin factory (increasing returns)
o Learning by doing
o Dynamic economy of scale, static is pure scale
- Wool trade, Queen Elizabeth (not spinning Jenny) -
Distinction between England and Spain
Absolute advantage: The capability to produce more of a given product using less of a given resource
than a competing entity. Comparative advantage: The ability of a party to produce a particular good
or service at a lower marginal and opportunity cost over another.
Economies of scale are the cost advantages that enterprises obtain due to their scale of operation,
with cost per unit of output decreasing with increasing scale.
Cell: 9810371353, E-Mail: jayatijnu@gmail.com
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International Trade, Finance and Development
Week 2: Monday
R205, International Trade and Finance
Ricardo (2x2x1(= one factor)-model)
- No transport costs
➔ Everything is defined in terms of labor inputs
➔ Labor homogenous (Fixed in economy, but mobile across sectors (e.g. people can switch from
producing wine to cloths)
- Full employment (= critical assumption):
- Constant return to scale (CRS): It doesn’t matter how much you are producing, it will still
request the same amount of labor
Definition of constant returns to scale. When an increase in inputs (capital and labour) cause the
same proportional increase in output. Constant returns to scale occur when increasing the number of
inputs leads to an equivalent increase in the output.
- Increasing return to scale (IRS)
An increasing return to scale occurs when the output increases by a larger proportion than the
increase in inputs during the production process. For example, if input is increased by 3 times, but
output increases by 3.75 times, then the firm or economy has experienced an increasing return to
scale.
- Market structure counterpart of CRS: Perfect competition (Perfect competition & CRS
exist incommutably)
- Technology fixed in each country, + differs across countries (= critical assumption) →
Technology differences that are driving this model, else its same opportunity costs
Definition of opportunity costs. When an option is chosen from alternatives, the opportunity cost is
the "cost" incurred by not enjoying the benefit associated with the best alternative choice. The New
Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one
alternative is chosen
- Identical tastes across countries
- Mobility of labor (= critical assumption) → No problem to shift labors along sectors is
false, level of specialization matters; learning by doing!
- Specific factors model: Gives you ultimately results. Natural resource-based kind of trade
(e.g. rice, sugar) follows a different assumption.
Why do countries trade?
Countries trade with each other when, on their own, they do not have the resources, or capacity to
satisfy their own needs and wants. By developing and exploiting their domestic scarce resources,
countries can produce a surplus, and trade this for the resources they need.
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Heckscher Ohlin Model (2x2x2(= two factors)-model)
- Countries vary in factor endowment (deutsch “Faktorausstattung”)
- Technology is the same across countries
- No capital flows, no labor movements
- Capital abundance
General assumptions
- CRS
- Perfect competition
- Commodities differ in factor intensity: (K/L)X > (K/L)y
- Factor use depends hugely on relative pricing
- Countries trade to consume more → better welfare
- Determined by factor propositions and factor advantage
- US+EU = similar factor propositions, largest trading partners
The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical model of
international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of
Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of
commerce and production based on the factor endowments of a trading region. The model
essentially says that countries export products that use their abundant and cheap factors of
production, and import products that use the countries' scarce factors.
Rybezynski Theory
The Rybczynski theorem was developed in 1955 by the Polish-born English economist Tadeusz
Rybczynski (1923–1998). It states that at constant relative goods prices, a rise in the endowment of
one factor will lead to a more than proportional expansion of the output in the sector which uses
that factor intensively, and an absolute decline of the output of the other good.
Leontief Paradox
- Different tastes, different factor intensities of M+M substitutes
- Natural resource trade
- Labor is not homogenous, US got skilled labor-intensive commodities
Leontief's paradox in economics is that a country with a higher capital per worker has a lower
capital/labor ratio in exports than in imports. Leontief found that the United States – the most
capital-abundant country in the world – exported commodities that were more labor-intensive than
capital-intensive, contrary to H-O theory.
Comparative advantage
The law of comparative advantage describes how, under free trade, an agent will produce more of
and consume less of a good for which they have a comparative advantage. In an economic model,
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agents have a comparative advantage over others in producing a particular good if they can produce
that good at a lower relative opportunity cost or autarky price,
A factor endowment, in economics, is commonly understood to be the amount of land, labor, capital,
and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a
large endowment of resources tend to be more prosperous than those with a small endowment if all
other things are equal.
Samuelson Theory
S. B. Linder Theory
The more similar the demand structures of countries, the more they will trade with one another.
Further, international trade will still occur between two countries having identical preferences and
factor endowments (relying on specialization to create a comparative advantage in the production of
differentiated goods between the two nations).
Week 2: Wednesday
- Trade is just an extension of your own society
- Trade appears because of product differentiation
- higher goods of higher quality
- Per capita income (PCI) or average income
➔ Income distribution
- Demand Similarity
- Trade is a substitute for the movement of actors (mimicking)
➔ Outcome of trade
- Welfare benefit for everybody
- Variety
Definitions
- Gross Domestic Product (GDP) is the monetary value of all finished goods and services
made within a country during a specific period
- A monopoly is one firm, duopoly is two firms and oligopoly are two or more firms
- Monopolistic competition, imperfect market structure
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