Lecture 3.docx

Lecture 3 Linder’s Country Similarity Theory  Countries should reduce barriers for similar capita income countries.  50-60s Germany, car industry  Differentiated goods  Intra-industry New Trade Theory  Open up the markets to grow more, more efficient, more jobs  Economies of scale  Get more, and better products  Everyone benefits  More competition FPI vs FDI  Direct: you can have decisions, partnership, power  Portfolio: passive investment, stock, lending money FDI decisions: 1. Avoidance of Trade Barriers 2. Economic Development Incentives a. Tax breaks, subsidies Math: Slide 23  France can make 2 wines OR 3 clock radios per hour o France Absolute Advantage: Wine  Japan can make 1 wine OR 5 clock radios per hour o Japan Absolute Advantage: Clock radios Q2: -1 hour+ 1 hour 20 mins= 20 mins How much time does Japan save? -48 mins + 2 hours = 72 mins Q3: France Japan Wine 2 2 Clock 4 6 Comparative Adv. Q1: France focus on Wine and Japan focus on clock Although, France has an absolute advantage for both. 1:4 = 0.25 5:6= 0.83  Opportunity cost method: France Japan 1 W: 1.5 CR 1 W: 5 CR 0.67 W: 1 CR 0.2W: 1 CR France has a lower opportunity cost for wine. Japan has a lower opportunity cost for clock radios.

1.5 hours on Wine+ 0.5 hour on CR for FRANCE 1.5 hours on CR + 0.5 hour on Wine for JAPAN France Japan Wine 6 0 Clock 3 10 After trade: BOTH SIDES WIN.

Wine Clock

France 4 7

Japan 2 6

Wine Clock

France 4 6

Japan 1 5

Q3:

Hourly wage: 12 euros for France 8 euros for Japan France

Wine Clock

Japan

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Import

Import

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3 euros 2 euros

8 euros 1.6 euros

375yen 250 yen

1000 yen 200 yen

12:4 = 3 These are all commodities. All wines and clock radios are the same.