The Principle of Comparative Advantage

The Principle of Absolute Advantage

The Exchange Rates

The Balance of Payments

The International Trade and its Basic Theories

Lecture 8 The International Trade Theory

LOOKING AHEAD

Social Mobility in the United States

The belief in upward mobility is an important aspect of American society. In fact, no respon­dents in a survey taken in Michigan challenged the assumption that upward mobility was wide­spread in the United States (J. Huber and Form, 1973:96—97). Moreover, the comparative studies of social mobility discussed earlier indicate that this country has a higher level of upward mobility (as measured by entry into nonmanual positions) than many nations.

Does this mean that the United States is the land of opportunity? Not if the phrase "land of opportunity" implies that such ascriptive charac­teristics as race, gender, and family background have ceased to be significant in determining one's future prospects. The data on upward mobility do reflect, in part, the fact that our labor force is becoming more service-oriented and less dominated by blue-collar occupations.

♦ How are societies organized to deny privileges to some members while extending them to others?

♦ How did Karl Marx and Max Weber contribute to our understanding of social class?

♦ Can life be organized without structured inequality?

♦ How do sociologists measure social class?

♦ How likely are people in the United States either to move into or to rise out of poverty?

♦ Why do women and their children constitute an increasing proportion of America's poor?

Balance of Payments (BOP) – платіжний баланс

Foreign Exchange Reserves – валютні резерви

1.1. The International Trade and it's Basic Theories

International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP).

In order to understand how international trade increases the welfare of its citizens we need to consider why trade takes place. To do this the principles of absolute and comparative advantage should be considered.

The main concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication An Inquiry into the Nature and Causes of the Wealth of Nations.

A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources.

The Ricardian model focuses on comparative advantage. In a Ricardian model, countries specialize in producing what they produce best.

A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing anything, relative to their trading partners. The theory of comparative costs argues that, it is better for a country that is inefficient at producing a good or service to specialise in the production of that good it is least inefficient at, compared with producing other goods.

The Production Possibility Curve can be used to illustrate the principles of absolute and comparative advantage.

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Consider that Finland has comparative advantage in production of Paper (X) and interior market sets 1X = 0,5Y. In A it is 1X =2Y. Obviously Finland will export cheap product X to Britain. World price will be 1X = 1Y.

So after international trading in Britain consumer surplus rise from c to a+b+c+d. Producers loose a, because previously they had a+e and now only e. Net gain for Britain is b+d.

I n Finland consumers loose a part of consumer's surplus h+i, when producers get h+i+f. Net gain is f.

So global gain is b+d+f.

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