1. Before you begin this assignment, read Chapter 2 inInternational Economics Theory and Policy (see below)

Navigate to the threaded discussion and respond to the following:

1. What is the basis for trade (absolute or comparative advantage)?
2. How can an individual or a country gain from specialization and trade? (Please use an example.)
3. How was trade affected by the pride and idolatry of Babylon? Refer to your Bible and Internet Bible commentary found at theBible Study Toolswebsite. https://www.biblestudytools.com/

Chapter 2

The Ricardian Theory of Comparative Advantage

This chapter presents the first formal model of international trade: the Ricardian model. It is one of the simplest models, and still, by introducing the principle of comparative advantage, it offers some of the most compelling reasons supporting international trade. Readers will learn some of the surprising outcomes of the Ricardian model; for example, less productive nations can benefit from free trade with their more productive neighbors, and very low-wage countries are unlikely to be able to use their production cost advantage in many circumstances. Readers will also learn why so many people, even those who have studied the Ricardian theory, consistently get the results wrong.

In other words, the Ricardian model is both one of the most misunderstood and one of the most compelling models of international trade.

2.1The Reasons for Trade

LEARNING OBJECTIVES

1. Learn the five reasons why trade between countries may occur.
2. Recognize that separate models of trade incorporate different motivations for trade.

The first theory section of this course develops models that provide different explanations or reasons why trade takes place between countries. The five basic reasons why trade may take place are summarized below. The purpose of each model is to establish a basis for trade and then to use that model to identify the expected effects of trade on prices, profits, incomes, and individual welfare.

Reason for Trade #1: Differences in Technology

Advantageous trade can occur between countries if the countries differ in their technological abilities to produce goods and services. Technology refers to the techniques used to turn resources (labor, capital, land) into outputs (goods and services). The basis for trade in theRicardian model of comparative advantageinChapter 2 "The Ricardian Theory of Comparative Advantage"is differences in technology.

Reason for Trade #2: Differences in Resource Endowments

Advantageous trade can occur between countries if the countries differ in their endowments of resources. Resource endowments refer to the skills and abilities of a country's workforce, the natural resources available within its borders (minerals, farmland, etc.), and the sophistication of its capital stock (machinery, infrastructure, communications systems). The basis for trade in both the pure exchange model inChapter 3 "The Pure Exchange Model of Trade"and the Heckscher-Ohlin model inChapter 5 "The Heckscher-Ohlin (Factor Proportions) Model"is differences in resource endowments.

Reason for Trade #3: Differences in Demand

Advantageous trade can occur between countries if demands or preferences differ between countries. Individuals in different countries may have different preferences or demands for various products. For example, the Chinese are likely to demand more rice than Americans, even if consumers face the same price. Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than Americans would, even if they all faced the same prices. There is no formal trade model with demand differences, although the monopolistic competition model inChapter 6 "Economies of Scale and International Trade"does include a demand for variety that can be based on differences in tastes between consumers.

Reason for Trade #4: Existence of Economies of Scale in Production

The existence of economies of scale in production is sufficient to generate advantageous trade between two countries. Economies of scale refer to a production process in which production costs fall as the scale of production rises. This feature of production is also known as "increasing returns to scale." Two models of trade incorporating economies of scale are presented inChapter 6 "Economies of Scale and International Trade".

Reason for Trade #5: Existence of Government Policies

Government tax and subsidy programs alter the prices charged for goods and services. These changes can be sufficient to generate advantages in production of certain products. In these circumstances, advantageous trade may arise solely due to differences in government policies across countries.Chapter 8 "Domestic Policies and International Trade",Section 8.3 "Production Subsidies as a Reason for Trade"andChapter 8 "Domestic Policies and International Trade",Section 8.6 "Consumption Taxes as a Reason for Trade"provide several examples in which domestic tax or subsidy policies can induce international trade.

Summary

There are very few models of trade that include all five reasons for trade simultaneously. The reason is that such a model is too complicated to work with. Economists simplify the world by choosing a model that generally contains just one reason. This does not mean that economists believe that one reason, or one model, is sufficient to explain all outcomes. Instead, one must try to understand the world by looking at what a collection of different models tells us about the same phenomenon.

For example, the Ricardian model of trade, which incorporates differences in technologies between countries, concludes that everyone benefits from trade, whereas the Heckscher-Ohlin model, which incorporates endowment differences, concludes that there will be winners and losers from trade. Change the basis for trade and you may change the outcomes from trade.

In the real world, trade takes place because of a combination of all these different reasons. Each single model provides only a glimpse of some of the effects that might arise. Consequently, we should expect that a combination of the different outcomes that are presented in different models is the true characterization of the real world. Unfortunately, because of this, understanding the complexities of the real world is still more of an art than a science.

KEY TAKEAWAYS

• The five main reasons international trade takes place are differences in technology, differences in resource endowments, differences in demand, the presence of economies of scale, and the presence of government policies.
• Each model of trade generally includes just one motivation for trade.