Fins2622 Notes
REGIONAL ECONOMIC INTEGRATION
The Political Economy of Free Trade
Free Trade: David Ricardo (support free trade) o Theory of comparative advantage: For two nations without input factor mobility, specialisation and trade could result in increased total output and lower costs than if each nation tried to produce in isolation. Both nations can benefit from trade if each specialises in good that they have the lowest opportunity cost, even if one economy is more efficient in making everything. However, Comparative advantage in not static, and changes over time in reality. Also, comparative advantage assumes that factors of production can’t move between countries therefore comparative advantage is set to be outdated production and employment usually moves to the lowest cost economies Reality: Countries encourage exports, but limit imports o Due to mecantalism i.e. total world wealth is limited and trade is a 0‐sum game if one country benefits, the other loses in order to win, you encourage exports HOW? Through colanising therefore legislated that the country could only trade with colonised country. Who gains from free trade? Some say that comparative advantage is just a way for developed economies to gain Because before, developed economies were very protected (in order to establish their industries), and now they want everyone to do free trade (to benefit themselves). Since developed economies developed their industries a long time ago, they usually have a comparative advantage in high technology products (which lead to greater growth compared to agricultural products), whilst the developing countries specialise in the lower growth agricultural products. Creation of international institutions: GATT, WTO Creation of trade blocs
Regional Economic Integration
Stepping stone to globalisation What is regional Economic Integration? o Agreements between groups of countries aimed at reducing
The Political Economy of Free Trade
Free Trade: David Ricardo (support free trade) o Theory of comparative advantage: For two nations without input factor mobility, specialisation and trade could result in increased total output and lower costs than if each nation tried to produce in isolation. Both nations can benefit from trade if each specialises in good that they have the lowest opportunity cost, even if one economy is more efficient in making everything. However, Comparative advantage in not static, and changes over time in reality. Also, comparative advantage assumes that factors of production can’t move between countries therefore comparative advantage is set to be outdated production and employment usually moves to the lowest cost economies Reality: Countries encourage exports, but limit imports o Due to mecantalism i.e. total world wealth is limited and trade is a 0‐sum game if one country benefits, the other loses in order to win, you encourage exports HOW? Through colanising therefore legislated that the country could only trade with colonised country. Who gains from free trade? Some say that comparative advantage is just a way for developed economies to gain Because before, developed economies were very protected (in order to establish their industries), and now they want everyone to do free trade (to benefit themselves). Since developed economies developed their industries a long time ago, they usually have a comparative advantage in high technology products (which lead to greater growth compared to agricultural products), whilst the developing countries specialise in the lower growth agricultural products. Creation of international institutions: GATT, WTO Creation of trade blocs
Regional Economic Integration
Stepping stone to globalisation What is regional Economic Integration? o Agreements between groups of countries aimed at reducing