Principle Of Comparitive Advantage

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Comparative advantage applies the principle of specialization to countries:

In economics, the theory of comparative advantage explains why it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. What matters is not the absolute cost of production but the opportunity costs, which measures how much production of one good is reduced to produce one more unit of the other good. Comparative advantage is critical to understanding modern international trade theory.

Strengths: The law of comparative advantage as clear free trade implications: Since a country always gains from following its comparative advantage and trade barriers impede its ability to do so, trade protections is not beneficial to the economy.

Free trade lowers the price of imports and increase the efficiency of domestic production.
Free trade induces a country to follow its comparative advantage and is the best possible policy.

Back 1

Describe the principle of comparative advantage?
What are its strengths and weaknesses as a justification for free trade?

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Strengths: The law of comparative advantage as clear free trade implications: Since a country always gains from following its comparative advantage and trade barriers impede its ability to do so, trade protections is not beneficial to the economy.

Free trade lowers the price of imports and increase the efficiency of domestic production.
Free trade induces a country to follow its comparative advantage and is the best possible policy.

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What are its strengths and weaknesses as a justification for free trade?

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What does the principle of “Infant Industry” protection mean? In order to accelerate the process of industrialization, trade protection can be instituted to make foreign products less competitive, allowing domestic manufacturers to charge higher prices and reinvest the extra profit in the industry.

This has two negative effects: an adverse distributional effect, taxing consumers to the benefit of producers, and it reduces efficiency diverting resources from more productive to less productive uses.

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What does the principle of “Infant Industry” protection mean?

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Why was economic development in “areas of recent settlement” so successful in the late 19th century? These are areas of great resources that were not yet exploited. They attracted immigrants from Europe for their potential in the agricultural, mineral, and exploration fields. These areas were scarcely populated and few obstacles stood in the way of the exploitation of their primary resources. They were politically stable and legally predictable, with temperate climate and fertile land.

The capital from Europe invested in the new land made the economy thrive, generating massive export toward Europe, spawning a thriving processing industry and demand for goods produced locally favored industrialization.

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Why was economic development in “areas of recent settlement” so successful in the late 19th century?

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Describe the different effects sugar and cotton, on the one hand, and coffee and rice, on the other hand, had on tropical societies? 1913. Sugar and cotton can be farmed on large plantation that relied on the extensive supply of cheap labor closely watched by overseers who drove them thru the fields with no need for individual initiative and motivation. It was in the interest of the landowners to keep the workers from organizing, moving to different jobs, obtaining better education and so on.

Coffee and rice on the other hand can be grown on small farms were ideal smallholder crops. On these farms large scale gang labor was not practical and small and large farms could compete.
This favored the development of a vibrant agricultural economy with fair wages for workers who had the opportunity to work toward owning their own farm, better education, and were the wealthy reposition themselves from land owners into the export, finance, and commerce sectors.
Sugar and cotton were “reactionary” crops while coffee and rice were “progressive” crops

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Describe the different effects sugar and cotton, on the one hand, and coffee and rice, on the other hand, had on tropical societies?

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Which nations were major recipients of British Foreign investment in the late 19th century? Why these and not others? USA, Canada, Australia, South Africa, Argentina. The export of capital tended to go from countries that had plenty to countries that were willing and able to pay for it. These countries were the rapidly developing areas of recent European settlement.

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Which nations were major recipients of British Foreign investment in the late 19th century?

Why these and not others?

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What does Frieden argue was the effect of colonialism on economic development in the colonized regions? With the exception of cases of outright looting of the colonies’ natural resources and of privileged settler colonies, colonialism was not usually as insurmountable obstacle to economic development.
Colonialism was only one of many factors that affected development, and it was not always a negative one. Effective colonial rule sped up development as much as venial colonial exploitation delayed it.

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What does Frieden argue was the effect of colonialism on economic development in the colonized regions?

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What are the main factors that explain Britain’s relative decline as an industrial power? A popular explanation is investor enthusiasm for foreign investment. But domestic profitable ventures had no trouble being funded and foreign investment yield monies that could be domestically invested.

Another cause could be that the British failed to adopt new production and managerial techniques to keep pace with the development. In other words they were not dynamic enough. Also British firms tended to be smaller and often family based.

Another cause in to be found in the education system, with inadequate technical training no meritocracy and class based structure.

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What are the main factors that explain Britain’s relative decline as an industrial power?

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How did working class union and political action threaten the workings of global capitalism under the gold standard? The most common way to trim an economy to keep the gold standard is by cutting wages.
The employers’ ability to force wages down is key to the functioning of the gold standard.

Unions and political actions to temper the ability of markets and employers to set wages freely had profound impact on global capitalism because they aimed to provide workers with guaranteed earnings, by reducing wages and working hours’ flexibility.

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How did working class union and political action threaten the workings of global capitalism under the gold standard?

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Banker (1840 – 1915). He ran the London office of the house of Rothschild. His life encompassed the golden age and he used his influence to reinforce the three major pillars of the golden age international economy: finance, the gold standard, and free trade.

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Nathan Mayer Rothschild

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The best known early theoretician of industrialization by protection. List argued that free trade was the ultimate goal but to equalize relation among major powers temporary trade protection was required.

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Friedrich List

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“Each nation has a comparative advantage in the production of those goods that use intensively those factors that they possess in relative abundance.”

A country will export goods that make intensive use of the resources it has in abundance.
Countries with lots of land will export agricultural products and will import capital intensive industrial products, countries with lots of capital will export capital intensive products and import agricultural products.

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Heckscher-Ohlin Trade Theory

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Terms refers to colonies where the owners, the customers and the workers had no long term interest in the region and the impact on the local economy was minimal. They extracted whatever resources they could find in self contained enclaves of copper and gold mines or banana and sugar plantations.

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Enclaves

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The colonial power assigned control of an entire promising region to a commercial concessionaire. A private entity whose goal was to maximize profits not to develop the local economy. If commercial success and local economic development went together that was fine but where they conflicted the concessionaires’ responsibility was to the stockholders.

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Commercial Concessions

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The Eiffel Tower was built for the International Exhibition of Paris of 1889 commemorating the centenary of the French Revolution. The Prince of Wales, later King Edward VII of England, opened the tower. Of the 700 proposals submitted in a design competition, Gustave Eiffel's was unanimously chosen

Paris, France 1900. It was the largest the world had ever seen. The Eiffel Tower was build to celebrate it. It was the last of a series of seven.
It showed the emerging of Germany and Japan.

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Paris International Exhibition