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Chap 04
Chap 04
Chapter 4
A
10
Figure 4.1
K
5
B
G’ K’
0 5 10 15 20
Rice
© McGraw Hill Companies, Inc., 2000 4-9
The Theory of Absolute Advantage and
the Gains from Trade
Resources Required to Produce 1 Ton of Cocoa and Rice
Cocoa Rice
Ghana 10 20
S. Korea 40 10
Production and Consumption without Trade
Ghana 10.0 5.0
S. Korea 2.5 10.0
Total production 12.5 15.0
Production with Specialization
Ghana 20 0
S. Korea 0 20
Total production 20 20
Consumption after Ghana Trades 6T of Cocoa for 6TSouth Korean Rice
Ghana 14.0 6.0
S. Korea 6.0 14.0
Increase in Consumption as a Result of Specialization and Trade
Ghana 4.0 1.0
S. Korea 3.5 4.0 Table 4.1
© McGraw Hill Companies, Inc., 2000 4-10
Theory of Comparative Advantage
A
10
Figure 4.2
K
5
2.5 B
K’ G’
0 3.75 5 7.5 10 15 20
Rice
© McGraw Hill Companies, Inc., 2000 4-12
Comparative Advantage and the Gains
from Trade
Resources Required to Produce 1 Ton of Cocoa and Rice
Cocoa Rice
Ghana 10 13.33
S. Korea 40 20
Production and Consumption without Trade
Ghana 10.0 7.5
S. Korea 2.5 5.0
Total production 12.5 12.5
Production with Specialization
Ghana 15 3.75
S. Korea 0.0 10.0
Total production 15 13.75
Consumption after Ghana Trades 4T of Cocoa for 4TSouth Korean Rice
Ghana 11 7.75
S. Korea 4 6
Increase in Consumption as a Result of Specialization and Trade
Ghana 1.0 0.25
S. Korea 1.5 1.0 Table 4.2
© McGraw Hill Companies, Inc., 2000 4-13
Simple Extensions of the
Ricardian Model
Diminishing returns:
More a country produces, at some point, will
require more resources.
However:
Free trade can increase a country’s production
resources, and
Increase the efficiency of resource utilization.
© McGraw Hill Companies, Inc.,2000 4-14
Ghana’s PPF under Diminishing
Returns
Cocoa G
Figure 4.3 G’
0 Rice
© McGraw Hill Companies, Inc., 2000 4-15
The Influence of Free Trade on
the PPF
PPF2
PPF1
Cocoa
Figure 4.4 G’
0 Rice
© McGraw Hill Companies, Inc., 2000 4-16
Is the Mercantilist Theory Still
Valid?
A qualified Yes.
Equate political power with economic
power and economic power with a trade
surplus.
Japan
Q
u 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Firm Strategy,
Structure and
Rivalry
Related and
Supporting
Figure 4.6 Industries
© McGraw Hill Companies, Inc.,2000 4-31
The Diamond
Success occurs where these attributes exist.
More/greater the attribute, the higher chance of
success.
The diamond is mutually reinforcing.
Chance
Company Strategy,
Structure,
and Rivalry
Two external
factors that Factor Demand
influence the Conditions Conditions
four
determinants.
Related
and Supporting
Industries
Government
Source: Michael Porter, The Competitive Advantage of Nations