1. 6.0. International Political Economy Learning Objectives: –Familiar with the subject matter of IPE –Understand the principle relationships between the economic realm and the political realm in an international context –Understand the theory of Comparative Advantage

2. 6.0. International Political Economy What is IPE? The Growth of IPE

3. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order

4. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order –Trade!

5. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order –The theory of absolute advantage

6. Absolute Advantage (two countries, two products, one production input (labour) 1 roll of cloth1 Bushel of wheat Canada9 hours7 hours (more efficient) India3 hours (more efficient)12 hours If Canada and India trade, both countries can divert labour to the good they produce most efficiently. For example: –Canada diverts 100 hours of labour from cloth production to wheat –India diverts 100 hours of labour from wheat production to cloth

7. Absolute Advantage (two countries, two products, one production input (labour) Rolls of clothBushels of wheat Canada (100 hours from cloth production to wheat) -11 rolls (-100 hours divided by 9) +14 bushels (+100 hours divided by 7) India (100 hours from wheat production to cloth) +33 rolls (+100 hours divided by 3) -8 bushels (-100 hours divided by 12) Net gain from trade for Canada and India: 22 rolls of cloth and 6 bushels of wheat

8. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order –The theory of comparative advantage: the cornerstone of liberal economic theory and the basis of the world trading system!

9. Comparative Advantage (two countries, two products, one production input (labour) 1 roll of cloth1 Bushel of wheat Canada9 hours7 hours Mexico3 hours (more efficient)6 hours (more efficient) Mexico has absolute advantage in cloth and wheat Canada has comparative advantage in wheat If Canada and Mexico trade, both countries can divert labour to the good they produce comparatively efficiently. For example: –Canada diverts 100 hours of labour from cloth production to wheat –India diverts 50 hours of labour from wheat production to cloth

10. Comparative Advantage (two countries, two products, one production input (labour) Rolls of clothBushels of wheat Canada (100 hours from cloth production to wheat) -11 rolls (-100 hours divided by 9) +14 bushels (+100 hours divided by 7) Mexico (50 hours from wheat production to cloth) +17 rolls (+50 hours divided by 3) -8 bushels (-50 hours divided by 6) Net gain from trade for Canada and Mexico: 6 rolls of cloth and 6 bushels of wheat

11. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order –System wide gains from trade

12. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the building of the Liberal International Economic Order –Problems and challenges arising from trade

13. 6.1. The Beginning of Globalization: Liberal Economic Theory Guiding Principles: the Liberal Economic Framework from Bretton Woods to the Washington Consensus Trade (mutually beneficial exchange) Comparative Advantage Rules and Institutions

14. Summary At the end of this class, you should be able to describe the subject matter of IPE. You should be familiar with the relationship between the economic realm and the political realm in an international context. You should understand and be able to describe the theory of absolute advantage and the theory of comparative advantage. You should be familiar with the central concepts of the Liberal economic framework.