2. Supply, Demand, and Trade
in a Single Industry
An export supply curve is the difference between
the quantity that foreign producers supply minus
the quantity that foreign consumers demand, at
each price.
An import demand curve is the difference
between the quantity that domestic consumers
demand minus the quantity that domestic
producers supply, at each price.
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5. 2.2 The Mercantilists’ View on Trade
In the 17th century a group of men (merchants,
bankers, government officials, and philosophers)
wrote essays on international trade that advocated an
economic philosophy known as Mercantilism.
In their view, a country becomes rich if it exports
more than it imports.
The surplus in trade balance will result in an inflow
of precious metals; gold and silver.
The more precious metals means a richer and more
powerful nation.
Countries have to do their best to increase exports and
restrict imports.
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6. Since all countries cannot have surplus at the same
time and because the stock of metals is fixed in the
short run, a country gains from trade only at the
expense of others.
Wealth of nations was measured by the stock of
metals they possess.
In contrast, today we measure wealth of a nation by
its stock of human, man-made, and natural resources
available for producing goods and services.
Mercantilits advocated strict government control of
economic activity because gain from trade comes at
the expense of other nations (i.e. zero-sum-game).
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7. Classical school
The Classical School of economics was developed
about 1750 and lasted as the mainstream of economic
thought until the late 1800’s.
Adam Smith's Wealth of Nations, published in 1776 can
be used as the formal beginning of Classical
Economics.
Adam Smith [1723-1790] is recognized as the originator
of Classical Economics.
John Stuart Mill [1806-1873] is often regarded as the
synthesizer of the school.
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8. The main classical economists:
Adam Smith,
David Ricardo,
Thomas Malhtus,
Jean Babtiste Say
John Mill.
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9. The common concepts for Classical thought
Economic liberalism and limited
government role in the economic
activities.
Full Employment.
Say’s Law.
D.Hume & External Balance.
Perfect Competition.
Static analysis.
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10. Adam Smith and Absolute Advantage law
Specialization is better than self-sufficiency.
Each country specialize in the production of goods which
can produce at lower absolute costs in terms of labor costs,
and export its surplus to the world.
Each country will stop the production of goods which can
produce at higher absolute costs in terms of labor costs,
and import its needs to the world.
Numerical example :
Assumptions (2 countries (USA & China), 2 goods (Wheat &
Green Tea) one factor of production(labor ) and the
available economic resources are 600 units of labor in USA
and the same in China)
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11. Adam Smith and Absolute Advantage law
According to table (1) each country can allocate the available economic
resources to produce both of two goods before trade as shown in table
(2)
Table (1) : Absolute costs Matrix
Labor requirements to produce one ton of each good
USA China
Wheat 20 120
Green Tea 100 30
Table (2) : Economic resources allocation before trade
USA China
Wheat 100 units of labor 480 units of labor
Green Tea 500 units of labor 120 units of labor
Total 600 600
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12. Before Trade each country produces both of wheat and green tea. At
the same time each country consumes the same amount of wheat and
green tea, so there is no exchange between USA and China as shown in
table (3)
After trade each country specializes in the production of good which
can be produced at lower absolute cost. At the same time each country
stopped the production of good which can be produced at higher
absolute cost.
USA will export wheat to China and import green tea from China, also
china will export green tea to USA and import wheat from USA.
Table (3) : the production & Consumption before trade
USA China
Wheat 5 tons 4 tons
Green Tea 5 tons 4 tons
The world 10 tons 8 tons
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13. After Trade each country produced only the absolute advantage good,
so USA directs 600 units of labor to produce wheat only. And China
directs 600 units of labor to produce Green Tea only as shown in table
(4)
After trade USA produces 30 tons of wheat but the American market
needs only 5 tons and the Chinese market needs 4 tons so the surplus
of wheat = 21 tons (surplus distribution 50% for each country) .
After trade China produces 20 tons of Green Tea but the Chinese
market needs only 4 tons and the American market needs 5 tons so the
surplus of green tea = 11 tons (surplus distribution 50% for each
country) .
Table (4) : the production After trade
USA China
Wheat 30 tons -
Green Tea - 20 tons
The world 30 tons 20 tons
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14. Gains from trade in USA
Table (5) : Gains from trade in USA (Tons)
ChangeAfter tradeBefore Trade
Variables
G. TeaWheatG. TeaWheatG. TeaWheat
(5)25-3055
Domestic
Production
5.510.510.515.555
Domestic
Consumption
-14.5-14.5--Exports
(10.5)-10.5---Imports
40 TonsNet change (Gains from trade in USA)
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15. Gains from trade in China
Table (6) : Gains from trade in China (Tons)
ChangeAfter tradeBefore Trade
Variables
G. TeaWheatG. TeaWheatG. TeaWheat
16(4)20-44
Domestic
Production
5.510.59.514.544
Domestic
Consumption
10.5-10.5---Exports
-(14.5)-14.5--Imports
24 TonsNet change (Gains from trade in China)
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