Download International Political Economy

International Political Economy
Absolute Advantage
Comparative Advantage
International Political Economy
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Why do states seek Monetary
Cooperation?
Who benefits from Trade
Agreements?
How do the structure of the IMF
alter domestic political
arrangements?
How can foreign investors “vote” in
another country?
The “isms”: Realism
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Realism (Mercantilism, Statism)
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Main actors are states
States primarily concerned with power
and/or economic security
International economy conflictual,
zero-sum game; insecurity of anarchy
breeds competition; state concerned
about relative gains of other states
because of need to defend itself
The “isms”: Liberalism
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Liberalism (including NeoInstitutionalism)
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Main actors are individuals/groups acting
through states or other institutions
Seek to maximize personal utility, generally
through free markets except where
inefficiencies need to be overcome
International economy generally cooperative,
although coordination frequently necessary.
The “isms”: Radicalism
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Marxism
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Actors are classes described by different
factors endowments (labor and capital)
Class interests are conflictual and exploitative
Capital controls the government and promotes
own interests.
World Systems Theory
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Actors are states defined by different factor
endowments (capital rich, labor rich)
Class interests are conflictual and exploitative
Capital controls states and international
organizations and promotes own interests
Forms of Trade Protection
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Tariffs
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Import
Export
NTB (Non-Tariff Barriers)
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Quotas
Regulatory Barriers
Subsidies
Exchange Controls
Theory of Absolute Advantage
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“The capacity of one nation to produce more of a good
with the same amount of input than another country.”
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Each nation should specialize in producing goods it
could produce most efficiently
 In absolute advantage, both nations would gain from
trade.
Assumptions
 Perfect competition and no transportation costs in a
world of two countries and two products.
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Adam Smith claimed that market forces, not
government controls should determine the direction,
volume, and composition of international trade.
Political Economy of Trade
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Absolute Advantage
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Adam Smith Wealth of Nations (1776)
States differ in ability to produce
certain goods
If one state more productive in one
good and the second in another should
trade those goods.
Absolute Advantage of Free Trade
Production
per worker
Wheat
(bushels)
Iron
(tons)
Britain
100
250
USA
200
150
Prices Without Trade:
Price of bushel of wheat in UK = 2.5 tons of Iron
Price of bushel of wheat in US = .75 tons of Iron
Price of ton of iron in UK=.4 bushels of wheat
Price of ton of iron in US=1.3 bushels of wheat
Why Trade?
•For iron producers in Britain, to get 4 bushels of wheat in UK, need to give up 10 tons of
iron. If trade with the US, for 10 tons of iron can buy 7.5 bushels of wheat. Could
consume more wheat (or spend less iron, could purchase 4 bushels for 3 tons)
•For wheat producers in US, could get 3.3X more Iron for each bushel of wheat.
•Isn’t this bad for British wheat producers and US Iron producers? No should shift
employment. Can then have more iron and more wheat.
Production per 200 workers
Britain
USA
Total Output
Split workers 50/50
Wheat
Iron
10,000
25,000
20,000
15,000
30,000
40,000
Specialize
Wheat
Iron
50,000
40,000
40,000
50,000
World Benefit too! Both production of wheat and iron increase by 10,000 units.
Theory of Comparative
Advantage

“A nation having absolute disadvantages
in the production of two goods compared
to another nation,
 has a comparative advantage in
producing the good in which its
absolute disadvantage is less.”
 Theory of comparative advantage
demonstrated by Ricardo in 1817.
Political Economy of Trade
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Comparative Advantage:
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David Ricardo On the Principles of Political
Economy and Taxation (1817)
States differ in ability to produce certain goods
No need for absolute advantage in productivity
As long as 2 states differ in relative
productivity of at least 2 goods within their
economies…
 It
makes sense for states to specialize
and trade
 Comparative advantage also tells us in
which good each state should
specialize
Comparative Advantage
Production
per worker
Wheat
(bushels)
Iron
(tons)
Britain
300
1200
USA
200
100
Britain better than the US in everything! But
relative prices still differ at domestic level.
Price of bushel of wheat in UK = 4 tons of Iron
Price of bushel of wheat in US = 1 tons of Iron
Price of ton of iron in UK = .25 bushels of Wheat
Price of ton of iron in US = 2 bushels of Wheat
Why Trade?
•For the iron producers in the UK, to get 4 bushels of wheat in UK, need to give up 16
tons of Iron. If trade with the US, 16 tons of Iron purchase 32 bushels of wheat (or
purchase 4 for 2 tons)
•For wheat producers in US, costs 2 bushels of wheat for 1 ton of Iron. If purchase
from UK can get 8 tons of Iron for same 2 bushels (or could purchase the 1 ton for
only .25 bushel).
What is each country’s comparative advantage? The UK is still better off paying
producing Iron and paying the US price of wheat and the US is still better off producing
wheat and paying the UK price for Iron! (What about what farmers in Britain and Iron
workers in US?)
If the UK protects its wheat markets, what should the US do?
Ricardo’s comparative advantage:
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Global welfare is maximized when everyone
chooses free trade
Each nation’s welfare is maximized by
unilateral free trade
BUT within aggregate some win and some lose
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No “losers” assumes perfect mobility between
industries
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What if some labor can’t move between wheat
and iron?
Or what if comparative advantage not in
industries but in factors of production (land,
labor, capital) and individuals defined by
ownership of these factors?
AND some countries “win” relatively more than
others