eco203 ch.1
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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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Deriving Home’s Import Demand Curve
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Deriving Foreign’s Export Supply Curve
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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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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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Classical schoolThe 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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The main classical economists: Adam Smith,David Ricardo, Thomas Malhtus, Jean Babtiste SayJohn Mill.
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The common concepts for Classical thoughtEconomic 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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Adam Smith and Absolute Advantage lawSpecialization 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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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 120Green Tea 100 30
Table (2) : Economic resources allocation before trade
USA ChinaWheat 100 units of
labor480 units of
laborGreen Tea 500 units of
labor120 units of
laborTotal 600 600 11Dr.Saber Shaker
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 ChinaWheat 5 tons 4 tons
Green Tea 5 tons 4 tonsThe world 10 tons 8 tons
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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 tradeUSA China
Wheat 30 tons -Green Tea - 20 tonsThe world 30 tons 20 tons
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Gains from trade in USATable (5) : Gains from trade in USA (Tons)
Change After trade Before TradeVariables
G. Tea Wheat G. Tea Wheat G. Tea Wheat
(5) 25 - 30 5 5 Domestic Production
5.5 10.5 10.5 15.5 5 5Domestic Consumption
- 14.5 - 14.5 - - Exports
(10.5) - 10.5 - - - Imports
40 Tons Net change (Gains from trade in USA)
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Gains from trade in ChinaTable (6) : Gains from trade in China (Tons)
Change After trade Before TradeVariables
G. Tea Wheat G. Tea Wheat G. Tea Wheat
16 (4) 20 - 4 4 Domestic Production
5.5 10.5 9.5 14.5 4 4Domestic Consumption
10.5 - 10.5 - - - Exports
- (14.5) - 14.5 - - Imports
24 Tons Net change (Gains from trade in China)
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