1. Specialisation and trade and pattern of trade
Topic 9: aggregate demand and aggregate supply
Specialisation and trade and pattern of trade

2. 4.1.2 Specialisation and trade, 4.1.3 pattern of trade
Students should be able to:
Analyse factors influencing the pattern of trade between countries and changes in trade flows between countries (comparative advantage, impact of emerging economies, growth of trading blocs and bilateral trading agreements and changes in relative exchange rates)
Define absolute and comparative advantage (numerically and diagrammatically)
Analyse the assumptions and limitations relating to the theory of comparative advantage
Evaluate the advantages and disadvantages of specialisation and trade in an international context

3. Why does international trade occur?
Microeconomics Topic 1: The Economic Problem
Why does international trade occur?

4. What factors influence the pattern of trade?
Microeconomics Topic 1: The Economic Problem
C_________________ advantage (see later)
Impact of emerging economies: countries tend to grow and thus tend to ________ more; hence they need to _______ more to pay for this
Growth of trading ________ and bilateral trading agreements (see 4.1.5)
Changes in relative exchange ________ (see )
blocs, comparative, export, import, rates

5. Microeconomics Topic 1: The Economic Problem
Shares of World Economic output in 2015: Brazil, China, France, Germany, India, Japan, Russia, UK, USA

6. Microeconomics Topic 1: The Economic Problem
Absolute advantage
Microeconomics Topic 1: The Economic Problem
______________: pin factory and specialisation
What is specialisation?
Absolute advantage exists when a country is able to produce a good more _____________ in absolute terms than another country

7. Absolute advantage example
Microeconomics Topic 1: The Economic Problem
Absolute advantage example
Cost per unit in worker hours
Wheat
Wine
England 10 15
Portugal 20
Assume there are only two countries producing only two goods and labour is the only cost.
Which has an absolute advantage in wine?
Which has an absolute advantage in wheat?
What would benefit both countries?

8. Comparative advantage
Microeconomics Topic 1: The Economic Problem
David Ricardo – countries are better off trading even if they can produce all goods more cheaply
Comparative advantage exists when a country is able to produce a good more cheaply relative to other goods produced domestically than another country
Theory of comparative advantage: countries will find it mutually advantageous to trade if the opportunity cost of production differs

9. Comparative advantage example
Microeconomics Topic 1: The Economic Problem
Comparative advantage example
Cost per unit in worker hours
Wheat
Wine
England 15 30
Portugal 10
How many hours?
One unit of wine in England takes ____ worker hours to produce
One unit of wheat in England takes ___ hours
One unit of wine in Portugal takes ____ hours
One unit of wheat in Portugal takes ___ hours

10. Comparative advantage example
Microeconomics Topic 1: The Economic Problem
Comparative advantage example
Cost per unit in worker hours
Wheat
Wine
England 15 30
Portugal 10
Portugal has an absolute advantage in both
Wine in England costs twice as much to produce as wheat. Wine in Portugal costs ____ times as much to produce as wheat.
Portugal has a comparative advantage in _____
It would benefit both countries if they traded and England produced ________, Portugal _______

11. Exam marks: opportunity cost calculations
Microeconomics Topic 1: The Economic Problem
Cost per unit in worker hours
Wheat
Wine
England 15 30
Portugal 10
Opportunity cost of 1 unit wheat
Opportunity cost of 1 unit wine
England
Portugal

12. How do I calculate opportunity cost for England?
Microeconomics Topic 1: The Economic Problem
How do I calculate opportunity cost for England?
Cost per unit in worker hours
Wheat
Wine
England 15 30
England takes ___ hours to produce 1 unit wheat and ___ hours to produce 1 unit wine
After 15 hours it has produced 1 unit wheat or 0.5 unit wine
So opportunity cost of 1 unit wheat is 0.5 wine
After 30 hours it has made __ wine or __ wheat
So opportunity cost of 1 wine is ___ wheat

13. How do I calculate opportunity cost for Portugal?
Microeconomics Topic 1: The Economic Problem
How do I calculate opportunity cost for Portugal?
Cost per unit in worker hours
Wheat
Wine
Portugal 10 15
Portugal takes ___ hours to produce 1 unit wheat and ___ hours to produce 1 unit wine
After 10 hours it has produced ___ unit wheat or ________ unit wine
So opportunity cost of 1 unit wheat is ______ wine
Also after 15 hours it has made __ wine or ____ wheat
So opportunity cost of 1 unit wine is _____ wheat

14. Exam marks: opportunity cost calculations
Microeconomics Topic 1: The Economic Problem
Exam marks: opportunity cost calculations
Cost per unit in worker hours
Wheat
Wine
England 15 30
Portugal 10
Opportunity cost of 1 unit wheat
Opportunity cost of 1 unit wine
England
Portugal
England has a lower opportunity cost than Portugal for _______ so England should produce ______
Portugal has a lower opportunity cost than England for ______ so Portugal should produce ______

15. Comparative advantage example continued
Microeconomics Topic 1: The Economic Problem
Comparative advantage example continued
Cost per unit in worker hours
Wheat
Wine
England 15 30
Portugal 10
Assume England and Portugal have 300 workers each and before they traded England produced 4 units of wheat, Portugal 15. Complete the table
Before trade
After trade
Wheat
Wine
England 4
Portugal 15
Total 19

16. Calculations for England before trade
Microeconomics Topic 1: The Economic Problem
England has 300 worker hours.
1 unit wheat takes 15 hours and England produced 4 units of wheat, this takes _____________ hours
Therefore England has ______ hours = ____ hours to make wine
Wine takes 30 hours to make
__________ hence England makes ___ units wine

17. Calculations for Portugal before trade
Microeconomics Topic 1: The Economic Problem
Portugal has 300 worker hours.
1 unit wheat takes ___ hours and Portugal produced ____ units of wheat, this takes ___ hours
Therefore Portugal has _________ hours to make wine
Wine takes 15 hours to make
hence Portugal makes _____ units wine

18. Calculations for England after trade
Microeconomics Topic 1: The Economic Problem
England has 300 worker hours and it has a comparative advantage in wheat so it will only make wheat
1 unit wheat takes 15 hours to make
300/15 = _____ units wheat

19. Calculations for Portugal after trade
Microeconomics Topic 1: The Economic Problem
Portugal has 300 worker hours and it has a comparative advantage in wine so it will only make wine
1 unit wine takes 15 hours to make
__ units wine

20. Comparative advantage answers
Microeconomics Topic 1: The Economic Problem
Comparative advantage answers
Before trade
After trade
Wheat
Wine
England
Portugal
Total
Before trade total production was ___ wheat and ___ wine (___ units in total)
After trade total production was __ wheat and ___wine (___units in total)

21. Plot the straight line PPFs for England and Portugal
Microeconomics Topic 1: The Economic Problem
Plot the straight line PPFs for England and Portugal
England has 300 hours and it takes 15 hours to make wheat or 30 to make wine.
If England only made wheat it would produce 300/15 = 20 wheat and no wine
If England only made wine it would produce 300/30 = 10 wine and no wheat.
PPF goes through (0, 20) and (10, 0) etc.
Plot wine on x-axis and plot Portugal ON THE SAME GRAPH

22. Quick check – opportunity cost from the graph
Microeconomics Topic 1: The Economic Problem
Wheat Wine
Portugal
England
Portugal
Opportunity cost of 1 unit wheat =
Opportunity cost of 1 unit wine =
England

23. Theory of Comparative advantage
Microeconomics Topic 1: The Economic Problem
The theory of Comparative advantage states that countries will find it mutually advantageous to trade if comparative costs of production differ.
What happens if comparative costs are identical?

24. Microeconomics Topic 1: The Economic Problem
Exam question
Explain whether country A should specialise in wheat or rice (4 marks). Use calculations
Wheat
Rice

25. Quick check – opportunity cost from the graph
Microeconomics Topic 1: The Economic Problem
Wheat Wine
Country A 500,000
Country B
Country A
Opp. cost of 1 unit wheat =
Opp. cost of 1 unit wine =
200,000/200,000 = 1

26. Microeconomics Topic 1: The Economic Problem
Exam answer
Microeconomics Topic 1: The Economic Problem
Calculating opportunity cost:
Country A has a lower opportunity cost than B in ______ (_____compared to 1kg) and so A should specialise in ______ (and similarly country B should specialise in ________).
Opp. cost of 1 unit wheat
Opp. cost of 1 unit rice A B
Wheat
Rice

27. Assumptions of the theory of comparative advantage
Microeconomics Topic 1: The Economic Problem
There are no ______________ costs (but high ______________ costs may prevent trading)
Costs are constant and there’s no ___________ of scale (but EoS tend to favour specialisation)
There are only two economies producing _____ goods (but theory works with multiple goods and countries)
Goods are homogenous (true for ___________)
Factors of _____________ are perfectly mobile
No tariffs or ______________
Perfect knowledge

28. Microeconomics Topic 1: The Economic Problem
Advantages of trade

29. Disadvantages of trade
Microeconomics Topic 1: The Economic Problem
Disadvantages of trade

30. What was the GDP of India (in USD) in 2015?
Microeconomics Topic 1: The Economic Problem
This website says:
$7.965 trillion
But other websites say $2.091 trillion
Both figures are correct! Why?