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Notes On International Economics - Assignment Example

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This econ assignment "Notes On International Economics" present the notes on various lectures on Economics, such as Mercantilism, Adam’s Smith Theory of Absolute Advantage, Ricardo’s Theory of Comparative Advantage, The Hecksher-Ohlin Model, Inter-industry trade versus intra-industry trade, etc…
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Notes On International Economics
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Download file to see previous pages This is so because they believed in static international economic relations which means one can only gain if the other losses.
Adam Smith was the pioneer of classical economics who for the first time explained the term absolute advantage in the context of international economics in 1776. His theory of absolute advantage is based on a notion that the country should only manufacture and specialize in the goods which it can produce at a lower cost. Adam Smith was a great proponent of free trade. His views of international trade are based on labor division and international specialization.
Assume that there are two countries i.e. the UK and the USA which are trading two goods i.e. wheat and cloth internationally. The UK produces wheat by hiring 10 labors whilst the US has the advantage to produce the same amount of wheat by employing 6 laborers.
The above statistics reveal that the US has labor specialization in the production of wheat and the UK specializes in the production of cloth. This situation leads to trade between the US and UK for wheat and cloth respectively. According to Smith’s theory of trade, the US should export wheat whilst UK should export cloth if they want to gain from the trade.
Portugal has an absolute advantage in wine and cloth production over the UK. According to the theory, the UK will export cloth because its absolute disadvantage is less here as compared to the production of wine. Contrarily Portugal should export wine as its absolute advantage in case of wine is greater comparatively.
Before trade production of wine requires 120 labors whilst cloth’s production involves 100 labors which means the production of cloth is cheaper in the UK. This is so because 1 unit of wine will cost 1.2 (120/100) units of cloths. More precisely, with labor UK can either produce 1 unit of wine or 1.2 units of cloth. ...Download file to see next pagesRead More
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