1. Surplus was the Reason for Trade | |
Reasons for Trade | (i) Surplus was the main reason for the peoples of the ancient world to trade. Also, in the former Soviet Union bloc. (ii) Before WWII (first century AD - 1945), comparative advantage was the reason for trade. (iii) Innovation played no role (i.e., no R&D). (Technical know-how was available, but input supplies were limited in Europe and Asia during the post-war period, 1945 - 75. Hence, production technologies, excepting military technologies, of trading countries were the same.) In a stationary economy, dissimilar factor endowments were the major reason for international trade (The Heckscher-Ohlin theory applies to trade in the modern world during the postwar period, 1960 - 2000). |
Surplus | Those who settled down in river basins were successful in agriculture, and these surpluses were exported to neighboring regions in return for other goods. Surplus of a product simply means that its autarky price is lower in the exporting country than elsewhere. Beer was produced circa 3500 BC in Mesopotamia. |
Sumerians |
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Babylon's trade
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Sumerians were the first beer drinkers. They knew how to make beer and they had the raw materials. Sumerians traded with the people in the mountains. They needed wheat and barley, and they traded timber, copper and flax for wheat. (Barter trade) Silver and grains were used in payment. Even in modern times, the Communist bloc countries exported surpluses to other members and avoided trading with free market economies. Mesopotamia was conquered by Babylonians around 2300 BC, taking over their technologies when they left the region. Babylonians produced 20 different varieties of beer (Samuel Adams: 60 varieties), drinking beer with straws. Babylonians exported beer to faraway countries, even to Egypt. This Babylonian clay tablet is the first map of the world. Circles were used to denote city centers, and this method has been adopted by cartographers ever since. Babylonians were interested in geography because of their exports of beer and other agricultural surpluses. Even before the silk road was built, Babylonia during the Kassite dynasty (1595-1157 BC) imported cobalt for coloring glasses from China (Donald McKenzie, Myths of Babylonia and Assyria, 1915). This Babylonia-China trade resulted in harmony of time counting. Both Babylonia and China (Shang dynasty) used the sexagesimal system. Spring and Autumn Annals used a sexagenary lunar calendar, dividing the day into 24 hours. This synchronicity may have been the result of trade between the two regions. |
6. Absolute vs. Comparative Advantage | |
Absolute Advantage | If aL1 < aL1*,
then the HC is said to have an AA in industry 1. HC = Home country, FC = Foreign country |
Different productivities due to weather and other conditions | Ricardo: Labor productivities differ between countries |
Comparative Advantage | If aL1/aL2 < aL1*/aL2*,
then the HC is said to have a CA in industry 1 [The autarky (relative) price of good 1 in HC is less than that in FC]. |
Note that aL1/aL2 = (p1/p2)A
is the relative price of good 1 in autarky. Remark: A country may have AAs in both commodities, but it cannot have CAs in both commodities. Similarly, a country may have AAs in many commodities, but it cannot have CAs in all commodities. |
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World outputs under two scenarios | |
More outputs can be produced under free trade. Yet we need to prove that each country will be better off under free trade. The gap between autarky and free trade points above measures the gains from trade. How the gains are distributed between the two countries depends on the exchange rate. When trade is balanced, both countries benefit from trade. Currently, $1 = 6.5 yuan and the US has a huge bilateral trade deficit. If $1 = 4 yuan, US-China bilateral trade deficit would disappear, but China's GDP of 100 trillion yuan would change from $15 trillion to $25 trillion, much greater than US GDP. China would no longer enjoy the tariff benefit of Developing Countries. |
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