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Elective Part 2 (1) Extension of Trade Theory. Extension of Trade Theory Production possibilities frontier & trade theory Comparative advantage & its.

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Presentation on theme: "Elective Part 2 (1) Extension of Trade Theory. Extension of Trade Theory Production possibilities frontier & trade theory Comparative advantage & its."— Presentation transcript:

1 Elective Part 2 (1) Extension of Trade Theory

2 Extension of Trade Theory Production possibilities frontier & trade theory Comparative advantage & its relationship with globalization

3 Elective Part 2 (1) Extension of Trade Theory A.Production possibilities frontier (PPF) 1.1Production possibilities frontier & trade theory B.Trade theory

4 Elective Part 2 (1) Extension of Trade Theory To learn about the PPF A.Production possibilities frontier To understand the slope of the PPF reflects opportunity cost To analyze how changes in the quantity of resources & production technology affect the PPF To explain why the PPF is concave to the origin

5 Elective Part 2 (1) Extension of Trade Theory What is a production possibilities frontier? Production possibilities frontier: Shows the locus of the maximum output combinations of two goods given the existing resources endowment & technological level.

6 Elective Part 2 (1) Extension of Trade Theory constant Assumption: Marginal cost is constant. Production point Good X (units) Good Y (units) A06 B14 C22 D30 Marginal cost of the good on the x-axis = Slope of the PPF downward sloping PPF is a downward sloping line. marginal cost The slope of the PPF is the marginal cost of the good on the x-axis. maximum output combinations The maximum output combinations of goods that are attainable.

7 Elective Part 2 (1) Extension of Trade Theory Parallel in resources Parallel outward shift of PPF Change in resources

8 Elective Part 2 (1) Extension of Trade Theory Advancement in technology Intercept of the PPF Advancement in technology

9 Elective Part 2 (1) Extension of Trade Theory Diminishing marginal returns = The marginal cost will finally rise PPF is generally concave to the origin PPF is concave to the origin

10 Elective Part 2 (1) Extension of Trade Theory To understand the consumption choice under autarky B.Trade theory To learn about the trade line To examine how international trade expands consumption possibilities To explain comparative costs & gains from trade with the PPF

11 Elective Part 2 (1) Extension of Trade Theory Consumption choice in an autarky economy maximum The consumption possibilities frontier shows the locus of the maximum combinations of consumption of an economy.

12 Elective Part 2 (1) Extension of Trade Theory Slope of trade line = Terms of trade Relative price = Relative price of Good X increased Blue area: The increased consumption possibilities with trade. Trade line Trade line: Trade line: A straight line passing through the production point, which shows the consumption opportunities brought by trade.

13 Elective Part 2 (1) Extension of Trade Theory Specialization and trade according to the principle of comparative advantage further expand consumption possibilities. Trade line = Consumption possibilities frontier Changes in consumption possibilities increased Blue area: The increased consumption possibilities.

14 Elective Part 2 (1) Extension of Trade Theory Comparative cost Country B: Comparative advantage specialization Comparative advantage & specialization in producing X. Country A: Comparative advantage specialization Comparative advantage & specialization in producing Y.

15 Elective Part 2 (1) Extension of Trade Theory Assumptions: (1) specialization according to comparative advantage; (2) there is trade; (3) terms of trade: 1X = 1Y Gains from trade Consumption possibilities Total gains from trade: 2X & 2Y Country A Country B

16 Elective Part 2 (1) Extension of Trade Theory A.What is economic globalization? 1.2Comparative advantage & its relationship with globalization B.The effects of globalization

17 Elective Part 2 (1) Extension of Trade Theory To understand the concept of economic globalization A.What is economic globalization? To analyze comparative advantage & its relationship with globalization To examine the controversies over economic globalization

18 Elective Part 2 (1) Extension of Trade Theory What is economic globalization? The process of which international trade and production activities across countries or regions become more frequent.

19 Elective Part 2 (1) Extension of Trade Theory Goods markets (1) International trade (3) Firms: competition (2) Trade barriers (4) Consumers: choice

20 Elective Part 2 (1) Extension of Trade Theory (1) Capital flow across countries (2) Global expansion of financial markets (3) Foreign direct investment (FDI) Financial & investment markets

21 Elective Part 2 (1) Extension of Trade Theory (1) Immigrants & imported labour Labour market

22 Elective Part 2 (1) Extension of Trade Theory (2) Outsourcing / relocation of tasks Labour market

23 Elective Part 2 (1) Extension of Trade Theory (3) Networked labour market Firms: Production costs Workers: Job opportunities Competition Labour market

24 Elective Part 2 (1) Extension of Trade Theory part of a good The specialization of the part of a good which a country or region has a comparative advantage in the global production chain. Changes in the nature of international division of labour

25 Elective Part 2 (1) Extension of Trade Theory shift The comparative advantage in a good or component part will shift from one region to another along with changes in economic development. Dynamic comparative advantage

26 Elective Part 2 (1) Extension of Trade Theory The expansion of the organization & scale of enterprises Through foreign direct investments, the scope of expansion of large enterprises is extended from developed countries to emerging markets.

27 Elective Part 2 (1) Extension of Trade Theory Online trading Online auction Online Bookshop Online Payment Online Shopping The increasingly networked business models

28 Elective Part 2 (1) Extension of Trade Theory (1)International organizations that promote global trade and economic cooperations. (2) Arrangements that facilitate regional economic cooperation. (3)The formulation & implementation of international standards.

29 Elective Part 2 (1) Extension of Trade Theory To learn about the gains from trade brought by globalization B.The effects of globalization To analyze the effects of globalization on labour, income distribution & capital flow across countries To analyze the effects of globalization on multinational enterprises, small enterprises & consumers

30 Elective Part 2 (1) Extension of Trade Theory Gains from trade Consumers: Choice World output Average production cost Prices Globalization: (1) Enhances economic growth. (2) Gives consumer more choices.

31 Elective Part 2 (1) Extension of Trade Theory Employment opportunities & income A change in income distribution (1) Economic restructuring (2) Labour demand & supply (3) Differences in the mobility of production resources

32 Elective Part 2 (1) Extension of Trade Theory Effects of capital flow across countries (1) Enhancing global economic growth (2) Financial risks Market competition Environmental conservation

33 Elective Part 2 (1) Extension of Trade Theory


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