Chapter 2 - The Law of Comparative Advantage

KHOA MARKETING – KINH DOANH QUỐ C TẾ
NGUYỄN TIẾN THÀNH
 BA Faculty
 Email: mim.thanhnguyen@gmail.com
 Linked in: fr.linkedin.com/in/thanhtiennguyen
T.S Nguyễn Tiến Thà nh

INTERNATI
ONAL
ECONOMICS
Nguyễn Tiế n Thà nh

CONTENT
01
INTRODUCTION
02
INTERNa1TIONa1L
TRADE THEORY
INTERNa1TIONa1L 03
RESOURCE MOVEMENTS
04
TRADE RESTRICTIONS-
TARIFF
Th.S Nguyễn Tiến Thà nh
NON TARIFF TRADE
05
BARRIERS
06
FOREIGN EXCHANGE
MARKET
EXCHANGE RATE
07
GLOBALIZATION

INTERNATIONAL TRADE THEORY 02
1. Understand the law of comparative advantage
2. Understand the relationship between opportunity costs and
relative commodity prices
3. Explain the basis for trade and show the gains from trade under
constant costs conditions
4. What is the basis for trade & what are the gains from trade
T.S Nguyễn Tiến Thà nh

The Law of Comparative Advantage
2.1 Mercantilist thesis on trade (THUYẾT TRỌNG THƯƠNG)
Nguyễn Tiến Thành

The Middle Ages extended in the 14th and 15th centuries
France and Britain confronted In 1453, the Turkish

peasant uprisings Ottoman Empire
wiped out the East
and proceeded to
invade Western
Europe
1492, Colombus found America, expanding In 1498, Vasco da Gama traveled from
trade. Europe to India and found a trading
route in the Indian Ocean.
 In the early 16th century, the American colonization of Europe

 Capitalizing and developing the capitalist economy
 Mercantilism and foreign trade thrive
IDEA
EXPORT
IMPORT
Trade surplus
Neo-
mercantilism
LỊCH SỬ PHÁT TRIỂN
Appeared in 15th Ngăn chặn

century (1450s) chảy tiền ra
ngoài (1554)
Agriculture does not create Industry costs money
Bourgeois Economy Export is the most important Na1tioNa1l economic

William Stanfford:
Theory:
Khuyến khích mang
tiền về
- Robbery and
exchange of - Quy định tiền
imbalances with Phải có sự thiệt thòi 1 bên vàng
the colonies.
- Against feudal - Xâm chiếm nước
and bourgeois khác
Zero-sum is a situation in game theory in which one person’s gain is equivalent to
another’s loss, so the net change in wealth or benefit is zero.
ZERO-SUM
Game
Mercantilism is an economic theory
that advocates government regulation
of international trade to generate
wealth and strengthen national power.
Merchants and the government work
together to reduce the trade
deficit and create a surplus.
2.2 Absolute advantage (THUYẾT LỢI THẾ TUYỆT ĐỐI)
Invisible hand is a metaphor for

how, in a free market economy,
self-interested individuals
operate through a system of
mutual interdependence to
promote the general benefit of
society at large.
IDEA
Absolute advantage is the ability of an individual,

company, region or country to produce a good or
service at a lower cost per unit than another entity that
produces the same good or service.
An entity with an absolute advantage can produce a

product or service using a smaller number of inputs or
a more efficient process than another entity producing
the same good or service.
Germany Medicine
India Rice, Coffee bean, Rubber
America Machine, High tech devices
China Semiconductors, Machine
Japan Diamond, Agricultures
Korea Aircraft, Computer
Viet Nam Car, Car’s parts
Israel Steel, Device,...

Germany Medicine
India Rice, Coffee bean, Rubber
America Machine, High tech devices
China Semiconductors, Machine
Japan Diamond, Agricultures
Korea Aircraft, Computer
Viet Nam Car, Car’s parts
Israel Steel, Device,...

SIMULATION
Cost = Hours of labor/ product
VN (1000h) France (1000h)
Rice (500h) 2h 5h
Wine (500h) 7h 2h
Autarky Economy Quantity

VN France VN France
Rice = 2/7 Wine = 5/2 Wine Rice 250R 100R
Wine = 7/2 Rice = 2/5 Rice Wine 71,5W 250W

Cost = Hours of labor/ product
2h VN (1000h) France (1000h)
Rice (500h) 2h 5h
Wine (500h) 7h 2h
Comparison:
VN FR
R/W = 2/7 < 5/2
 VN Exp Rice
 FR Exp Wine
Quantity in Autarky
VN France World
Rice 250 100 350R
Wine 71,5 250 321,5W
Quantity in Specialization
VN France World
R 500 0 500R
W 0 500 500W
Trading
VN France
Rice > 2/7 Wine Rice < 5/2 Wine
Wine < 7/2 Rice Wine > 2/5 Rice
Rice = (2/7 ; 5/2) Wine (Or) Wine = (2/5 ; 7/2) Rice
 If we take: 5 Rice = 4 Wine <=> [R=4/5W]
VN: 5 Rice trade with 4 Wine  300 Rice = 240 Wine

Quantity after Trading
VN France
Rice 500-300=200 0+300
Wine 0+240 500-240=260
VN: 5 Rice = 4 Wine  300 Rice = 240 Wine

Quantity in Autarky
VN France World
Rice 250 100 350R
Wine 71,5 250 321,5W
Rice = (2/7 ; 5/2) Wine (Or) Wine = (2/5 ; 7/2) Rice
Rice = 39/28 Wine (Or) Wine = 39/20 Rice  Equal Benefits

Practicing
1. Determine the productive scale, demand and substitution rate in

the Autarky economy.
2. Determine each Nation’s advantage & the range for mutually

beneficial trade.
3. Determine the equal international trade ratio.

Labor cost (Hours of labor/ product)
China (800h / 2) Japan (800h/ 2)
Silk 1 5
Vacuum Cleaner 4 2
Hours of labor/ product

Thailand (600h / 2) Laos (600h / 2)
Durian (300h) 3 5
Beer (300h) 4 1,5
Quantity in Autarky (Labor hour/ Product)
Thailand(600h/2) Laos (600h/2) World
Durian (300h) 100 60 160
Beer (300h) 75 200 275
• Autarky model
Dr = 3/4 Beer Dr = 10/3 Beer Specializing
TL ;Laos Thailand Laos World
Beer = 4/3 Dr Beer = 3/10 Dr
Durian 200 0 200
• Exchange
Beer 0 400 400
Dr 310Thailand Exp Dr
Beer 4 3 Laos Exp Beer
• Trading
Dr > 3/4 Beer Dr <10/3 Beer
TL ; Laos
Beer < 4/3 Dr Beer > 3/10 Dr
Dr = (3/4 – 10/3) Beer Or Beer = (3/10 - 4/3) Dr
Dr = 2 Beer  75Dr = 150Beer Quantity after trading

Thailand Laos TG
• Equalizing benefit
Dr = 49/24 Beer Durian 200-75 = 125 0 + 75 = 75 200
Beer = 49/60 Dr
Beer 0 + 150 = 150 400 - 150 = 250 400
Productivity (Products/ Hours of labor)
USA (1200h SX/ 2) Korea (1200h SX/ 2)
Kimchi (600h) 2Kc = 1h 4Kc = 1h
Apple (600h) 5Ap 3Ap
Productivity (Products/ Hours of labor)

India (1000h SX/ 2) Holland (900h SX/ 2)
Milk 2 5
Medicine 6 3
Quantity in Autarky
USA (1200h) Korea (1200h) World
Kimchi (600h) 1200 2400 3600 KC
Apple (600h) 3000 1800 4800 Apple
• Autarky model
KC = 5/2 Apple KC = 3/4 Apple Specializing
USA ;Kr USA Korea World
Apple = 2/5 KC Apple = 4/3 KC
KC 0 4800 4800 KC
• Exchange
Apple 6000 0 6000
KC 2 
4 Kr Exp KC Apple
Apple 5 
3 USA Exp Apple
• Trading
KC < 5/2 Apple KC > 3/4 Apple
USA ; Kr
Apple > 2/5 KC Apple < 4/3 KC
KC = (3/4 – 5/2) Apple Or Apple = (2/5 - 4/3) KC
KC = 2 Apple1500 KC = 3000 Apple
• Equalizing benefit
KC = 13/8 Apple After trading
Apple = 26/30 KC USA Korea TG
KC/Apple
KC 0+1500 4800 - 1500 4800
3/4 13/8 5/2 = 3300
KC < APPLE KC > APPLE
KOR < USA KOR > USA Apple 6000 – 3000 0 + 3000 6000
=3000
Productivity/ Hours of labor
AUS (1000h SX/ 2) Italy (1200h SX/ 2)
Grape 3 4
Strawberry 5 3

India (800h SX/ 2) Holland (900h SX/ 2)
Software 2 5
Tulip 6 3
Absolute Advantage  Wrong
What if your country has nothing to trade

2.3
Comparison
Comparative
advantage
IDEA
CONCEPT
Comparative advantage is an economy's ability to produce a

particular good or service at a lower opportunity cost than its
trading partners. A comparative advantage gives a company the
ability to sell goods and services at a lower price than its
competitors and realize stronger sales margins.
THE LAW OF COMPARATIVE ADVANTAGE 2.3.1
David Ricardo:
Comparative advantage is 1. Only two countries, two commodities;
an economic term that refers
to an economy's ability to 2. Free trade;
produce goods and services 3. Perfect mobility of labor within each
at a lower opportunity cost
than that of trade partners. Na1tion but immobility between two
Na1tions
A comparative advantage
gives a country the ability to 4. Cost of production is constant;
sell goods and services at a 5. No tranortation cost;
lower price than its
competitors. 6. No change in technical status;
SIMULATION AND ANALYSIS 1.3.2
VN (1100h Produce) France (1100h Produce)
Shrimp (500h) 1h = 1T 2,5h = 1T
Bread (600h) 1,5h = 1B 2h = 1B
Autarky model
Autarky economy
VN France
VN France
Shrimp = 2/3 Bread = 5/4 Bread
Shrimp 500 200
Bread = 3/2 Shrimp = 4/5 Shrimp Bread 400 300
Determine the advantages
Shrimp 1h < 2,5h

Bread 1,5h < 2h
Import
CHUYÊN MÔN HÓA David Ricardo
S h r i m p / B re ad :
Comparison
) 2 /3 < 5 / 4 ( F R )
1. (VN
x p o r t S h r i m p
 VN e
e x p o r t B r e a d
 France
Trading
VN France
Shrimp > 2/3 Bread Shrimp < 5/4 Bread
Bread < 3/2 Shrimp Bread > 4/5 Shrimp
Shrimp = (2/3 – 5/4) [Or] Bread = (4/5 – 3/2) Shrimp  Shrimp = 23/24 Bread
Assumption: 1 Shrimp = 1 Bread  Trading ==> 150Shr = 150Bread
Quantity when Trading

VN France World
Shrimp 500 ------- 500 + ---
Bread -------- 300 ---- + 300

Labor cost
VN (1100h) France (1100h)
Shrimp (500h) 1 2,5
Bread (600h) 1,5H = 1B 2
1. VN Needs 150Shr  150h  Bread has left 450h  300Bread + 150Bread (FR)
2. FR Needs 150Bread  300h  Shr has left 200h  80Shr + 150Shr (VN)
Quantity after Trading

VN France
Shrimp 500 80 (Fr) + 150(Vn)
Bread 300(Vn) + 150(Fr) 300

Case 1 Cost
Na1tion 1 Na1tion 2
X X1 X2
Y Y1 Y2
X1 > X2
Y1 > Y2
** If X1/Y1 < X2/Y2  Na1tion 1 export X; Na1tion 2 export Y
** If X1/Y1 > X2/Y2  Na1tion 1 export Y; Na1tion 2 export X
Case 2: Productivities
Productivities (/LĐ)
Na1tion 1 Na1tion 2
X X1 X2
Y Y1 Y2
X1 > X2
Y1 > Y2
** If X1/Y1 < X2/Y2  Na1tion 1 export Y; Na1tion 2 export X
** If X1/Y1 > X2/Y2  Na1tion 1 export X; Na1tion 2 export Y
Labor cost (Hours of labor/ product)
Na 1 (800h / 2) Na 2 (900h / 2)
Bike (400/450) 4h = 1b 3
VC (400/450) 5 1,5
Productivity (Products/ Hour)

Na 1 (1200h / 2) Na 2 (1200h / 2)
Software (600h) 2So = 1h 6S = 1h
Med (600h) 3Med = 1h 5M=1h
PRODUCTIVITY
Na1 (1200h/2) Na2 (1200h/2) World
Software (600h) (2)=1200 (6)=3600 4800 Software
Medicine (600h) (3)=1800 (5)=3000 4800 Medicine
• Autarky Model
Soft = 3/2Med Soft = 5/6 Med Trading products
1 ;2 Na1 Na2 World
Med = 2/3 Soft Med = 6/5 Soft
Software -------- 3600
• Exchange
Med 1800 -------
Soft 2 
6 Na1 Exp Med
Med 3 
5 Na2 Exp Soft
• Trading
Soft < 3/2 Med Soft > 5/6 Med
1 ;2
Med > 2/3 Soft Med < 6/5 Soft
Software = (5/6 – 3/2) Med or  Med = (2/3 - 6/5) Software
3(Software) = 4(Med)  (Software)=4/3(Med)  1800(Software) = 2400(Med)

- Na2 needs 1800Software  need 300h  Med has 300h  1500Med + 2400
- Na1 needs 2400Me  need 800h  Soft has 0h  0 + thiếu 200h (600med) + 1800
Software = 7/6 Med
5/6 3/2 Quantity after trading
Na1 Na2 W
Software<Med Software>Med
Na2 < Na1 Na2 > Na1 Soft 0(1) + 1800 (2) 3600
Med 1800 - 600 1500(2) + 2400 (1)

CURRENCY EFFECT 2.3.2
1. Movements across many countries: re-export, transparent;

2. The impact of the government on price changes;
3. Other types of cost increases;
4. The cooperation of Nations 1 or global companies; multinational 1;
5. External effects; market economy…
6.EXCHANGE RATE
Labor cost (Hours of labor/product)
USA (10USD/h) China (40CNY/h)
Computer 40h 50h
Vacuum 50h 70h
Computer: 40 < 50
Vacuum: 50 < 70
40/50 > 50/70: USA has advantage in Vacuum

China has advantage in Computer
1 USD = 8 CNY
USA (1h=10USD) China(1h=40CNY)
Dom Price Export price Dom price Export price
(USD) (CNY) (CNY) (USD)
Computer 400$ 3.200CNY 2.000CNY 250$
Vacuum 500$ 4.000CNY 2.800CNY 350$
Computer and Vacuum price in China have advantage when dumping.

 The competitive strength of China in USA
 Currency effect
Comparative Advantage: Low Cost US Economy, Low Chinese Coverage 

China's Competitive Advantage Due to Lower US CPI
COST Price
USA (1h=10 China (1h=40CNY)
USD) COM: 40 50
COM (40h)=400USD (50h)=2.000CNY VC: 50 70
VC (50h)=500USD (70h)=2.800CNY
 CNN Exp COM
 USA Exp VC
COM: 400xUSD > 2.000 CNY

VC: 500xUSD < 2.800 CNY
 COM: 1USD > 2.000/400 CNY

VC: 1USD < 2.800/500 CNY
 Exchange rate range : 5CNY < 1USD < 5,6 CNY (OR) 5/28USD<CNY<1/5USD
Practices
1. Determine the productive scale, demand and substitution rate in the Autarky
economy.
2. Determine each Na1tion’s advantage & the range for mutually beneficial trade.
3. Determine the interNa1tioNa1l trade ratio.
4. Determining the benefits of supply and demand, then show the trading rate.
5. Determine the equilibrium in trade between the two Na1tions
6. Assume Na11 pays 1h = 3 USD. Na1 2 pays 1h = 2 €. What is the suitable exchange
rate to make mutually beneficial trading?
Na1 pays 1h = 3$. Na2 pays 1h = 2€
Products/ Hour
Na1 (1200h SX/ 2) Na2 (1200h SX/ 2)
Kimchi 4 8
Apple 5 6

Na 1 (800h SX/ 2) Na 2 (600h SX/ 2)
Car 4 6
Beer 4,5 5
Productivity Price
1 (1h=3 USD) 2(1h=2€)
KC (4)1/4h=0,75$ (8)1/8h=1/4€ KC: 4 8
APL (5)1/5h=3/5$ (6)1/6h=1/3€ APL: 5 6
 Na2 Exp KC
 Na1 Exp APL
KC: 0,75xUSD > 1/4 €

APL: 3/5xUSD < 1/3 €
 KC: 1USD > 0,33 €

APL: 1USD < 5/9 €
 Exchange rate: 0,33 € < 1USD < 5/9 € or ….
LIMITATIONS OF THESIS 2.3.3
1. The doctrine has not shown the competitive model in a monopoly and imperfect
competition
2. The impact of the government on trade
3. Comparative doctrine in static economy
4. The doctrine simply revolves around TG with 2 countries
What happens if a country has an edge over all?

What happens if one of the two countries will have nothing to gain
comparative advantage?
How does the impact of exteranl factors affect?
PRACTICE
Labor cost (hours/ 1 product)
Na1 (120.000h) Na2 (240.000h) World
X (60.000h/120.000h) (20) (60) ____X
Y (60.000h/120.000h) (30) (40) ____Y
3/ 3.000X = 3.250Y What is the rate?

1/ Autarky model
X = ---- Y X = ---- Y 4/ Equalizing benefit?
1 ;2
Y = ---- X Y = ---- X 5/ Which range Na1>Na2 and Na2<Na1
2/ Exchange 6/ Exchange rate
X ? ? ----- Exp X 1 (1h=2,5£) 2(1h=3$)
Y ? ? ----- Exp Y X (20) (60)
Y (30) (40)
Labor cost(hour/ 1 product)
Na1 (120.000h) Na2 (240.000h) World
X (60.000h/120.000h) (20)= 3.000X (60)=2.000X 5.000X
Y (60.000h/120.000h) (30)= 2.000Y (40)=3.000Y 5.000Y
1/ Autarky model
X = 2/3 Y X = 6/4 Y
1 ;2
Y = 3/2 X Y = 4/6 X
Quantity after trade
2/ Exchange Na1 Na2 World
X 2060Na1 Exp X X 3.000X -------
Y 3040Na2 Exp Y
Y --------- 3.000Y
3/ Trading
4/ Trading range:
X > 2/3 Y X < 6/4 Y
1 ;2
Y < 3/2 X Y > 4/6 X 3.000x =3.250Y
X = (2/3 – 6/4) Y OR  X = (4/6 – 3/2) Y  12X = 13Y
3.000X = 3.250Y
- Na1 needs 3.000X  needs 60.000h  Y still has 0h  0Y
- Na2 needs 3.250Y  needs 130.000h  X still has 0h  0X + more 10.000h = 250Y
5/ Equalzing benefit Quantity after trading

X = 13/12 Y Na1 Na2 WR
2/3 6/4
X 3.000X 0(2) + 3.000X (1)
6/ X<Y X>Y
Na1 < Na2 Na1 > Na2 Y 0 (1) + 3.250 (2) 3.000Y – 250Y
8/ Producing Cost
1 (1h=2,5£) 2(1h=3$)
X (20) (60) X: 20 60
Y: 30 40
Y (30) (40)
 Na1 export X
 Na2 export Y
X: 50 £ < 180$
Y: 75 £ > 120$
 X: 1 £ < 3,6 $
Y: 1£ > 1,6 $
 Exchange rate: 1,6 $ < £ < 3,6 $
COMPARATIVE ADVANTAGE AND
OPPORTUNITY COST
Opportunity costs represent the potential benefits an individual, investor,

or business misses out on when choosing one alternative over another.

IDEAS
1936 – Theory of
International  The value of gross output on the market is determined
Trade (1936) by the total number of labor required for production.
Gottfried Haberler: -Na1tural value is the original value to produce the
Austrian-American
economist: product
Reinvented -"Political" value = Market value is difficult to predict
Ricardian theories
and the formation due to market changes.
of alterNa1tive
opportunity cost
theory for labor  The opportunity cost of an alterNa1tive is defined as
value theory the cost of not choosing the "next best" alterNa1tive.
20m from leasing
15m from running business 5m from job

The Production Possibility Frontier Under Constant Cost 2.3.4
PPF is a curve that shows the alternative combinations of the two commodities that a Nation
can produce by fully utilizing all of its resources with the best technology available to it.
Y MRS = -∆y/∆x: Độ
90 dốc thể hiện sự đánh
đổi hai hàng hóa
A
B
C
D
X
180
Production Scale of Nation
VN Thailand
Computer (million) 90 150
Bike (million) 180 120
• VietNam has to convert either 90 or 180 to produce the remainder

 1 Computer = 2 Bike
• Thailand produce either 150 or 120
 1 Computer = 4/5 Bike
 Opportunity cost is the quantity of goods to be sacrificed to
produce the remaining goods
Opportunity cost
VN Thailand
COM 90 150
BIKE 180 120
• Opportunity cost
COM = 2BIKE COM = 4/5BIKE Trading
VN ; TL VN Thailand
BIKE = 1/2COM BIKE = 5/4COM
COM 0 150
• Comparison
BIKE 180 0
COM: 2 > 4/5  TL exp COM
BIKE: 1/2<5/4  VN exp BIKE
• Trading COM
COM < 2BIK COM > 4/5BIK 150
VN ; TL TL
BIK > 1/2COM BIK < 5/4COM
COM = (4/5 ; 2) BIK or  BIK = (1/2 ; 5/4) COM

120
60BIK = 70COM ==> COM = 6/7BIK BIKE
COM
After trading
VN VN Thailand W
90 COM 0 + 70 150 - 70
180 BIK 180 - 60 0 + 60

BIKE
PRACTICES (Opportunity cost)
Products Nation 1 Nation 2
Apple (A) 240 600
Banana (B) 1200 900
Products Nation 1 Nation 2

Ananas (A) 400 150
Beer (B) 80 600
1. Calculating the opportunity cost of two cases above.

2. Drawing the Production Possibility Frontier.
3. Defining the trading condition.
The standard Theory of International trade
1. Understand how the relative commodity prices and the

comparative advantage of Nations are determined under
increasing cost
2. Show the basis an the gains from trade with increasing cost
3. Explain the relationship between international trade and
deindustrialization

2.4 The Production Possibility Frontier With
Increasing Opportunity Cost

ILLUSTRATION 2.4.1
When decreasing Y  increase X:

Y = -5  X = +10.
 Decrease Y4Y3 = Increase X1X2

MRT
Y
 Px = |-ΔY|/|ΔX|: Opportunity cost

for substituting
X
|-ΔY|/|ΔX|: The rate MRT (The marginal rate
of transformation).
Opportunity cost increases due to:

- Product specialization comparative
advantage too much;
- Forced to use unfavorable resources.
CONSUMER BEHAVIOR AND INDIFFERENCE CURVE 2.4.2
The impact of consumer behavior

on supply curve formation
Đường bàng quan – Indifference curve
Demonstrates various options that the total usefulness (TU) constant
MRS = |-ΔB|/|ΔA| = MUa/ MUb
= (|-ΔY|/|ΔX|) = MUx/ MUy
TU(x,y) = max.
Consumption MU is equal:
MUx/Px = MUy/Py
Limited budget conditions:
X.PX + Y.PY = I
Equilibrium in Isolation 2.4.3
MRT = -∆y/∆x
Product Y
MRS = -∆y/∆x
Product Y
Product X Product X
E = Equilibrium in Isolation
• Tangency point
• Autarky
MRT = MRS =Py/Px
W
65
60
C
40 130
ENGLAND AMERICA
Productivity Opportunity Productivity Opportunity
Wheat Cloth Wheat Cloth Wheat Cloth Wheat Cloth
65 0 0,12 150 0 0,5

8 2
60 40 5 130 40 1,75
3 0,571
45 85 0,33 95 60 2,25
1,4 0,444
20 120 3 50 80 10
0,5 0,1
0 130 0,71 0 85
4
Determining Specialization International Benefits
advantages trade
Pc/Pw Rate in UK ecialize in New rate: - More
England = ¼ Cloth too much  Pc/Pa (B)= consumption
Pc increase Pc/Pw (B’).
 Stopping
Pc/Pw rate in production point
- Unchanged
USA = 4 (120C, 20W) Trading rate budget
W=C
Pc/Pa (A) < US ecialize in - Both of two
Wheat too much 
Pc/Pw (A’). Pw increase
60W = 60C countries can
 Stopping extend
UK: Cloth production point products more
US: Wheat (40C, 130W) than PPF
Lúa
PB’=1 USA
150
130 B’
Lúa
PA’= 4
ANH
E’
PB=1 D’
K III 70 III’
I 50
80 E A’
65 I’
60 A PLA=1/4
Vải
0 80
20 D B 40 85 100
Vải
0 40 60 120 130
INCREASING OPPORTUNITY COST AND INTERNATIONAL TRADE IN
THE ECONOMIC 2.4.6
Nation 1: Qdx = 180 - 2Px
Qsx = 60 + 4Px
Qdy = 340 - 4Py
Qsy = 40 + 2Py
Nation 2: Qdx = 400 - 4Px

Qsx = 40 + 2Px
Qdy = 180 - 2Py
Qsy = 60 + 4Py
Px, Py: USD

Qx, Qy: tr.
Tự cung, tự cấp
Na1:140X, 140Y Na2: 160X, 140Y
Px=20$/Py=50$  2/5 Px=60$/Py=20$  3
Autarky economic 300X and 280Y
Na1: Qdx = Qsx 180 – 2Px = 60 + 4Px  Px = 20

Na1: Qdy = Qsy  340 – 4Py = 40 + 2Py  Py = 50
Na12: Qdx = Qsx 400 – 4Px = 40 + 2Px  Px = 60

Na12: Qdy = Qsy  180 – 2Py = 60 – 4Py  Py = 20
Trading:
a. Benefit: 2/5 < 3 
b. ecialization: Na1 1: X  Tăng chi phí SX  Giá tăng

Na1 2: Y  Tăng chi phí SX  Giá tăng
 Na11: Rate of Px/Py tăng
 Na12: Rate of Px/Py giảm
c. Trading: Rate: 2/5 < (Px/Py)w < 3.

World price assumption: (Px)w = 40
(Py)w = 35
 2/5 < 8/7 < 3
Na1 Na2
Qdx = 100 Qdy = 200 Qdx = 240 Qdy = 110
Qsx = 220 Qsy = 110 Qsx = 120 Qsy = 200
EX = 120 IM = 90 EX = 120 IM = 90
Total in the World (Supplying) 340X & 310Y

Total in the World (Consuming) 340 X & 310Y
Quốc gia 1: Qdx = 180 - 2Px
Qsx = 60 + 4Px
Qdy = 340 - 4Py
Qsy = 40 + 2Py
PRACTICES
Quốc gia 2: Qdx = 400 - 4Px
Qsx = 40 + 2Px
Qdy = 180 - 2Py
Qsy = 60 + 4Py
Giả sử giá World : (Px)w = 45

(Py)w = 30
Demand and Supply, Offer Curves and Terms
of Trade
1. Show how the equilibrium price at which takes place is
determined by demand and supply.
2. Show how the equilibrium price at which takes place is

determined with offer curves
3. Explain the meaning of the terms of trade and how they

changed over time.
2.5 The Equilibrium – Relative Commodity Price
with Trade – Partial Equilibrium ANa1lysis

The Equilibrium – Relative Commodity Price
with Trade – Partial Equilibrium ANa1lysis
2.5.1
Na1tion 1 Na1tion 2
Qsx = 50 + Px Qsx = 40 + Px
Qdx = 90 - Px Qdx = 60 – Px
Autarky
Na1tion 1: Px = 20 USD; Qsx = Qdx = 70 tr. .
Na1tion 2: Px = 10 USD; Qsx = Qdx = 50 tr. .
Trading
Px(2) = 10 USD < Px(1) = 20 USD
 Na1tion 2 exports X, Na1tion 1 imports X
Trade: 10 USD < Pw < 20 USD  2 Na1tions equals  Pw = 15
Case 1: Pw 2$; Px = 13$ Case 2: Pw 2$; Px = 17$
Na1tion 1: Qsx = 50 + 13 = 63 Na1tion 1: Qsx = 50 + 17 = 67

Qdx = 90 – 13 = 77 Qdx = 90 – 17 = 73
NK = 14  NK = 06
Na1tion 2: Qsx = 40 + 13 = 53, Na1tion 2: Qsx = 40 + 17 = 57

Qdx = 60 – 13 = 47 Qdx = 60 – 17 = 43
Exp = 06  Exp = 14
World: + Px ; Px = 15 $ World: + Px ; Px = 15$

QG 2 Px($) TG Px($) QG 1 Sx
Px($)
A’
Sx A” 20 20
S
17 B C 15 E
15
13 B’ C’
A* D
10
A 10 Dx
Dx
X X X
50 10 70
Pic a Pic b Pic c
Terms of Trade 2.5.2
TOT increase only if

1. Total EXPORT > Total IMPORT: Trade surplus  ToT >1
2. Total EXPORT < Total IMPORT: Trade deficit  ToT<1
3. ToT points  Trading/ Offer Curve has some characteristics:
1. Toward the Exported Product
2. Close to which product, it will decide the situation of that country

3.2 OFFER CURVES
Terms of trade Exported X (Đ.vị ) Imported Y (Đ.vị )
(TOT)
Px/Py = 1; 1X = 1Y 10 10
Px/Py = 2; 1X = 2Y 22 44
Px/Py = 3; 1X = 3Y 27 81
Px/Py = 4; 1X = 4Y 30 120
TOT Na1tion export X = Px/ Py

TOT Na1tion import Y = Py/ Px
Foreign trade expresses the number of
import and export countries ready to buy
PRACTICES Nation 1
Trade rate (TOT) Quantity of X Quantity of Y
1X ; 1Y (X=Y) 10 10
1X ; 2Y (X=0,5Y) 12 24
1X ; 3Y (X=0,33Y) 13 39
1X ; 4Y (X=0,25Y) 15 60
1. Determine the TOT curve of Nation 1

2. What is the exported product of Nation 1?
3. Is the Nation 1 the trade surplus Nation?
Y 1. Nation 1 export X
2. Nation 1 is Trade deficit
X
Nation 2
Trade rate (TOT) Quantity of X Quantity of Y
1X ; 1Y (X=Y) 10 10
2X ; 1Y (0,5X=Y) 32 16
4X ; 1Y (0,25X=Y) 68 17
8X ; 1Y (0,125X=Y) 144 18
1. Determine the TOT curve of Nation 2

2. What is the exported product of Nation 2?
3. Is the Nation 2 the trade surplus Nation?
FACTOR ENDOWMENTS AND THE
HECHKSCHER – OHLIN THEORY

2.6 HECHKSCHER – OHLIN THEORY
Heckscher-Ohlin theory, in economics, a theory of comparative advantage in

international trade according to which countries in which capital is relatively
plentiful and labour relatively scarce will tend to export capital-intensive
products and import labour-intensive products, while countries in which
labour is relatively plentiful and capital relatively scarce will tend to export
labour-intensive products and import capital-intensive products.
Factor Intensive 2.6.1
K = Capital
L = Labor
Commodity X is L – Intensive
Commodity Y is K - Intensive
K L
X 4 4 Product X is intensive in Labor Exp X
Na1 Product Y is intensive in Kapital
Y 8 3
K L
Na2
X 5 4 Product X is intensive in Labor
Product Y is intensive in Kapital  Exp Y
Y 10 4
Na1 Na2
Na 2 is redundant in Kapital (K)
Pk/ Pl 8/6 9/7
Na 1 is redundant in Labor (L)
P*: Price
Factor Abundance 2.6.2
First way: ;
Physical unit: overall amount of capital and labor available to each Na1tion
Na1tion 1 is capital abundant. Na1tion 2 is labor abundant
Second way: = r/w (r is price of capital/ w wage rate)
Factor prices: overall amount of capital and labor available to each Na1tion
Na1tion 1 is capital abundant. Na1tion 2 is labor abundant
SOME MEANINGS FROM THE THEORY 2.6.3
• Labor intensive refers to a process or industry that requires a
large amount of labor to produce its goods or services.
• Capital intensive refers to business processes or industries that

require large amounts of investment to produce a good or service.
• A country is labor abundant if its endowment of labor is large

compared to other countries.
• A country is capital abundant if its endowment of capital is large

compared to other countries
PRACTICES
Nation 1 Nation 2
Factors
K L K L
Products
X 6 5 7 4
Y 4 7 3 9
Pk/ Pl 8/6 9/7

PRACTICES
Nation 1 Nation 2
Factors
K L K L
Products
X 5 6 5 2
Y 3 8 4 7
Pk/ Pl 9/5 4/6

PRACTICES
Nation 1 Nation 2
Factors
K L K L
Products
X 4 5 6 5
Y 3 7 5 8
Pl/ Pk 4/7 5/4

4.2 S – S (STOLPER – SAMUELSON) THEORY H-O-S
Model
1941

30% a year
Nation 1, Nation 2
Cloth (C), Steel (S).
Cloth (C) is Labor intensive, Nation 2 is Labor abundant
Steel (S) is Kapital intensive. Nation 1 is Capital abundant.
Nation 1 Nation 2
- Specialize: S  Ps, (Pc/Ps), - Specialize: C  Pc , (Pc/Ps),
- Ss K increase  r increase - Sc L increase  W increase
 (W/r)1.  (W/r)2.
World: (Pc/Ps)1 = (Pc/Ps)2 and (W/r)1 = (W/r)2
Relative Factor Price – Equation (B = B’)
RYBCZYNSKI THEORY
1955

Products Production factors
Labors (L) Kapital (K)
CLOTH (C) 4 1
STEEL (S) 2 3
900: Total Labor 600: Total Capital
4C + 2S = 900 S = 150
1C + 3S = 600 C = 150
 Decrease 01 Steel
 Increase 03 Clothes
If 4C + 2S = 1200 S = 120
+300 L 1C + 3S = 600 C = 240
PRACTICES
Apple (A) 6 1
BaNaNa (B) 3 4

1. Increasing number of labor up to 1500. Calculate the new
quantity
2. Increasing number of capital up to 1000. Calculate the new

quantity
PRACTICES
A 4 2
B 2 6

quantity

quantity
PRACTICES
A 5 3
B 2 4

quantity

quantity
Porter Diamond
Michael Porter’s Diamond Model (also known as the Theory of National

Competitive Advantage of Industries) is a diamond-shaped framework that
focuses on explaining why certain industries within a particular nation are
competitive internationally, whereas others might not. And why is it that
certain companies in certain countries are capable of consistent innovation,
whereas others might not? Porter argues that any company’s ability to
compete in the international arena is based mainly on an interrelated set of
location advantages that certain industries in different nations posses,
namely: Firm Strategy, Structure and Rivalry; Factor Conditions; Demand
Conditions; and Related and Supporting Industries. If these conditions are
favorable, it forces domestic companies to continuously innovate and
upgrade. The competitiveness that will result from this, is helpful and even
necessary when going internationally and battling the world’s largest
competitors.
Porter Diamond

THANK YOU

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KHOA MARKETING – KINH DOANH QUỐ C TẾ

NGUYỄN TIẾN THÀNH

 Linked in: fr.linkedin.com/in/thanhtiennguyen

T.S Nguyễn Tiến Thà nh

Nguyễn Tiế n Thà nh

Th.S Nguyễn Tiến Thà nh

T.S Nguyễn Tiến Thà nh

Nguyễn Tiến Thành

France and Britain confronted In 1453, the Turkish

 In the early 16th century, the American colonization of Europe

Appeared in 15th Ngăn chặn

Bourgeois Economy Export is the most important Na1tioNa1l economic

Invisible hand is a metaphor for

Absolute advantage is the ability of an individual,

An entity with an absolute advantage can produce a

India Rice, Coffee bean, Rubber

America Machine, High tech devices

China Semiconductors, Machine

Japan Diamond, Agricultures

Korea Aircraft, Computer

Viet Nam Car, Car’s parts

Israel Steel, Device,...

India Rice, Coffee bean, Rubber

America Machine, High tech devices

China Semiconductors, Machine

Japan Diamond, Agricultures

Korea Aircraft, Computer

Viet Nam Car, Car’s parts

Israel Steel, Device,...

Autarky Economy Quantity

Wine = 7/2 Rice = 2/5 Rice Wine 71,5W 250W

Wine 71,5 250 321,5W

Rice = (2/7 ; 5/2) Wine (Or) Wine = (2/5 ; 7/2) Rice

 If we take: 5 Rice = 4 Wine <=> [R=4/5W]

VN: 5 Rice trade with 4 Wine  300 Rice = 240 Wine

Wine 0+240 500-240=260

VN: 5 Rice = 4 Wine  300 Rice = 240 Wine

Rice = 39/28 Wine (Or) Wine = 39/20 Rice  Equal Benefits

1. Determine the productive scale, demand and substitution rate in

2. Determine each Nation’s advantage & the range for mutually

3. Determine the equal international trade ratio.

Hours of labor/ product

Beer (300h) 75 200 275

Dr = (3/4 – 10/3) Beer Or Beer = (3/10 - 4/3) Dr

Dr = 2 Beer  75Dr = 150Beer Quantity after trading

Productivity (Products/ Hours of labor)

Apple (600h) 3000 1800 4800 Apple

Hours of labor/ product

What if your country has nothing to trade

Comparative advantage is an economy's ability to produce a

Shrimp 1h < 2,5h

Quantity when Trading

Bread -------- 300 ---- + 300

Quantity after Trading

Bread 300(Vn) + 150(Fr) 300

Productivity (Products/ Hour)

Medicine (600h) (3)=1800 (5)=3000 4800 Medicine

Software = (5/6 – 3/2) Med or  Med = (2/3 - 6/5) Software

3(Software) = 4(Med)  (Software)=4/3(Med)  1800(Software) = 2400(Med)

Med 1800 - 600 1500(2) + 2400 (1)

1. Movements across many countries: re-export, transparent;

40/50 > 50/70: USA has advantage in Vacuum

Computer and Vacuum price in China have advantage when dumping.