International Trade and Investment Full Course Summary
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Course
International Trade and Investment (6013B0465Y)
Institution
Universiteit Van Amsterdam (UvA)
Book
International Economics: Theory and Policy with MyEconLab, Global Edition
Full Course Summary.
Many Graphs and Equations, highlighted in color to better illustrate important sections. Lecture Notes, Handout Notes, Tutorial Calculation Examples all combined in one summary.
Complete & Concise Summary International Economics (Grade: 8.4)
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College Of Economics And Business
International Trade and Investment (6013B0465Y)
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Week 1 Notes International Trade & Investment
The Gravity Model
→ model of the flow of trade between 2 countries
Trade flows are:
▪ Positively linked to the economic size of source country 𝑌 (𝑖) and destination country 𝑌 (𝑗)
▪ Negatively linked to geographical distance 𝐷𝑖𝑗
➔ Relates trade between 2 economies to their sizes; strong effects of distance
The Ricardian Model
2 countries A and B – 2 different goods 𝑋 and 𝑌
Only 1 factor of production: labor (mobile within country but not between countries)
𝑄𝑋𝐴 = Quantity of Good X in country A
𝐿𝐴𝑋 = Amount of Labor in country A
𝐴
𝑎𝐿𝑋 = unit labor requirement of Good X in country A
𝐴
1 / 𝑎𝐿𝑋 = labor productivity (technology → constant returns to scale)
→ bottom line: differences in labor productivity lead to comparative advantages and thus determine trade (not absolute
advantages as proposed by Smith)
→ Diminishing marginal productivity
Production Possibility Frontier
≡ Specifies combined maximum amount of production
with available labor supply for 2 different goods (C and
W) (assumption – all labor will be used)
𝑎𝐿𝐶 ∗ 𝑄𝐶 + 𝑎𝐿𝑊 ∗ 𝑄𝑊 = 𝐿
Slope =
= opportunity cost of C in terms of W
𝐴 𝐴
Intersectional labor mobility 𝑎𝐿𝑋 or 𝑎𝐿𝑌 (but not yet
international mobility) → wages will align because of the mobility
,Profit = R*Q – wage*unit labor requirement (assuming only labor and wages make up the cost)
Real wage = MPL = w / P
Relative price of good X must align with the relative labor unit requirement of good X
Relative cost of X = relative price of X
Bottom line: only produce the good where MC = MR
→ wage = Price/labor unit requirement
Example: 2 countries A and B, and 2 goods, cheese (c) and wine (w)
Country A has a comparative advantage such as
A country will export the product in which it has a comparative advantage and import the product in which it has a
comparative disadvantage
5 possible situations
(relative production of
cheese to wine)
, (1) No production of cheese in domestic and foreign country A
(2) Indifference between producing cheese and wine in domestic country A
Horizontal supply curve
(3) Domestic country A fully specializes in production of cheese and foreign country B fully specializes in production
of wine. Vertical supply curve
(4) Domestic country A fully specializes in producing cheese but indifference in foreign country B
(5) Both domestic country A and foreign country B produce only cheese
Gains from Trade can be measured by extended consumption possibilities
Reason → more efficient allocation of labor
Transportation costs can lead to traded goods becoming non-traded goods
Shortcoming of Ricardian Model:
, 1. Absence of effects of international trade on the distribution of wealth within countries; it assumes everyone
within a country gains from trade
2. Cannot explain protectionism
3. In reality countries are less specialized than Ricardian model predicts; extreme specialization is unrealistic
4. The model disregards the role of resources – some countries only have relative advantage because of their
abundance of particular production factors
Week 2 International Trade & Investment
CH 4: Specific Factors and Income Distribution
The Specific Factors Model
2 x 2 x 3 (short run) model
Labor = mobile factor that can move between sectors/industries
(only when a worker has not invested in occupation-specific skills)
Other factors that are specific can only be used in production of certain goods (here Capital + Land)
➔ Wage rates must be same in 2 sectors because of the assumption that labor is freely mobile between sectors
➔ Workers are paid their marginal product w / P = MPL = real wage
➔ Output price are equal to marginal costs P = w / MPL = nominal wage
➔ Diminishing returns to labor
, Slope of PP =
- 𝑴𝑷𝑳𝑭 /𝑴𝑷𝑳𝑪
or
- 𝑷𝑪 /𝑷𝑭
≡ If wage rate falls, other things equal, employers in a
specific sector will want to hire more workers
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