Session 7 International Trade: Comparative Advantage and Trade Barriers



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Sources of Comparative Advantage

  • Differences in technology
  • Differences in climate
  • Differences in factor endowments
    • Factors of production – land, labor and capital
    • Factor intensity – the factor that is used intensively in production
    • Heckscher-Ohlin model

Imagine an island with only two trees but lots of boats. The islanders produce two goods, coconuts and fish.
A nearby island has many trees, but it has very few boats.
Initially, there is no contact between the islands. However, a new navigational device will soon allow shipments between the islands. What will happen?

Only two treesexpensive domestic coconuts before trade

  • Only two treesexpensive domestic coconuts before trade
  • Imported foreign coconuts are cheap
  • Domestic price of coconuts with trade
  • Lots of boats cheap domestic fish before trade
  • New export markets for fish increases demand
  • Domestic price of fish with trade

Who cares about the price of coconuts?

  • Who cares about the price of coconuts?
    • People who own trees (land)
    • People who climb trees (labor)
  • Who cares about the price of fish?
    • People who own boats (capital)
    • People who sail and fish (labor)

Who could object?


Domestic consumers benefit.
Domestic producers are harmed.
Country begins to import and domestic price falls.
Domestic price is higher than world price.
C

Who could object?


Domestic producers benefit.
Domestic consumers are harmed.
Country begins to export and domestic price rises.
Domestic price is lower than world price.

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