Module 1: Introduction to International Trade
This module provides an overview of international trade, its history, and its importance in the global economy.
Lesson 3: Current Trends in International Trade
In this lesson, we'll explore fundamental trade theories that explain why countries engage in international trade and how they benefit from it. We'll focus on comparative advantage, a key concept in understanding trade patterns.
Key Points:
- Absolute advantage vs. Comparative advantage
- David Ricardo's theory of comparative advantage
- Opportunity cost in international trade
- Specialization and its benefits
- Terms of trade and gains from trade
- Modern trade theories (Heckscher-Ohlin model, New Trade Theory)
Interactive Example: Comparative Advantage
Let's explore how comparative advantage works using a simple two-country, two-good model.
Trade Simulation: Gold and Silver Production
Country 1 and Country 2 can both produce gold and silver. Use the simulation to see how trade based on comparative advantage can benefit both countries.
Country 1
Gold Production: 10
Silver Production: 5
Country 2
Gold Production: 6
Silver Production: 10
Explanation of Comparative Advantage
In this example:
- Country 1 has an absolute advantage in gold production (10 vs 6)
- Country 2 has an absolute advantage in silver production (10 vs 5)
- Country 1's opportunity cost for 1 gold is 0.5 silver
- Country 2's opportunity cost for 1 gold is 1.67 silver
Therefore, Country 1 has a comparative advantage in producing gold, while Country 2 has a comparative advantage in producing silver. By specializing and trading, both countries can increase their total production and consumption.
Discussion Questions
- How does the concept of comparative advantage challenge the idea that a country needs to be the best at producing something to benefit from trade?
- Can you think of real-world examples where countries specialize based on their comparative advantages?
- What factors might limit the application of comparative advantage theory in the real world?
Share your thoughts on these questions in your course discussion forum or with your study group.