Okay, let's talk about trade theory. So when we talk about trade, we look at countries specializing in manufacturing um what they produce best and then exporting what they don't need and then import products that can be produced efficiently in other countries and then gains occur because um the most efficient countries are producing those products and so therefore overall production will increase. All right. And so how does how does trade actually work? Some trade patterns make great sense. So why do they produce uh chocolate in Ghana or produce uh coffee in Brazil? Because they have a lot of uh a lot of natural resources there. Other patterns don't necessarily make sense. Why do they produce watches in Switzerland or automobiles and and um technology parts in Japan? So it it's it's less obvious for some of them, but trade reflects the the interreaction between the factors of production. So what you need to produce something and um and where where those goods are needed. And so there's a there's a process to determine where products should actually be produced. All right. So the the trade theory from Kugman suggests that um that there's are only so many firms that can produce and that where we choose to produce are based on um the resources that we have available such as land uh labor sources of labor capital resources that would be need and um Porter extends this and says yeah those are those are important for a competitive advantage but you also need domestic demand. That means some of your products doesn't need to be shipped elsewhere that you can um you can consume some of your product in your home territory. Domestic rivalry will keep prices controlled and and keep companies on their toes to manufacture uh products at a low cost and um uh in an efficient manner and then suppliers to help get your product from uh the production facility to where the demand is located. Now there's there's really sort of a spectrum of trade uh uh policy. One is mercantalism that says, you know, it's a zero- sum game. If uh if we produce something um and uh then then we win. If we have a trade surplus, if if you have a trade surplus, you win. Uh new trade theory says um I'm sorry, the Smith policy says the best thing is unrestricted trade. And then um Porter is well, it's somewhere in the middle middle. you know trade shouldn't be totally restricted to produce what you what you consume in your own country and it shouldn't be openly free it should be somewhere in between that so mercantalism is as I said it's a zero- sum game so if um when I produce something and I have a balance of of trade uh surplus then I win is in essence what it says and and um um the neo merkantilist which is the the newer version of mercantalism says that um that that strong political um organizations or countries have strong economic power and therefore end up with a surplus balance of trade. And uh this is one of the the challenges to China that uh that China manages the the uh the the value of its currency in order to um uh export a lot, import very little and maintain the the uh the money supply. And so uh it is it's very critical of China's policies at this point in time. Now when we look at trading um we look at the most efficient country should produce the product. But in in absolute advantage means that you have all of the items are in your favor to produce the product. You have the labor, you have the raw materials, and you you have the capability of producing it. um it's not a zero- sum game because you produce it and you consume what your country needs and then you uh then you export the rest and uh and then you import product that you need that you don't um produce as efficiently. So look at this example. So here we're looking at Ghana is the red line and South Korea is the green line and we presume that each country has 200 units of labor to produce product. If um Ghana were producing cocoa, it would take 20 units. I'm sorry. If Ghana were producing cocoa, it would cost 10 um units of of uh of labor. And therefore, given they had if they only produce cocoa, they could produce 20 units. So 20 time 10 is 200. That would use up all 200 uh allund 200 units of labor. On the other hand, um to produce rice in Ghana cost 20 units of labor. So, if they used all of their labor to produce rice, they could only produce um 10 grams or 10 uh 10 what is it? Uh 10 gallons of rice. I'm not I'm not sure what the unit of measure is for rice. Um South Korea on the other hand charges 40 u units of labor to produce cocoa. And so with 40 units of labor, they would only be able to produce five um units of cocoa total. And um meanwhile they they have to pay 20 units of labor to produce rice. And so altogether if they only produce rice I'm sorry it was I'm sorry for rice it's 10 units of labor. And so if they used all of their all of their units of labor to only produce rice they'd be able to com to produce 20 units of light rice. So the the the continuum is for Ghana they could produce 20 units of cocoa or they could produce 10 units of rice or somewhere in between. South Korea on the other hand could produce 20 units of rice or five units of cocoa or somewhere in between and there there should be a a maximum that's best for both countries. All right. So again, as I stated a moment ago, the um Ghana takes 10 units to produce um cocoa, 20 units to produce rice. South Korea takes 40 units to produce uh cocoa and 10 units to produce rice. So remember, they have 200 units total. So if South Korea only wanted to produce um cocoa, they would be able to produce five units of cocoa um to use up all 200 units of of labor. So if um if we produced um without any trade, Ghana could produce 10 units of cocoa and five units of rice. South Korea could do 2 and 1/2 units of cocoa and and 10 units of rice. And altogether, we would have produced 12 1/2 units of cocoa and 15 1/2 units of of rice. However, if we choose to specialize in in our competitive strength, cocoa in um Ghana only costs 10 units and with 200 units altogether, we could produce 20 units of of cocoa. On the other hand, South Korea has only needs 10 units of labor to produce uh rice. So with those if they produce no um they produce no cocoa and use those 10 units to produce only rice with 200 units they could produce 20 altogether. So whereas when we didn't trade at all we had 12 units of cocoa was produced total and 15 units of rice um produced total. If we specialize the production increases to 20 of each in this case. Hold on. Let me get rid of the annotation so we can move on to the next thing. Oops. Okay. Now, if we trade then, and so they each trade six tons of their product, then um then we end up with um instead of having instead of Ghana having 20 units of cocoa, they're going to have 14 and ship six to South Korea. And then South Korea will do the same with its rice. It will ship six units of rice to South Korea. So overall the consumption will increase. Previously for cocoa um Ghana was able to um consume 10 with this change. Hold on a second. They're actually able to increase um they were going to have 10 units of of cocoa. um if they trade some of their cocoa to South Korea, they're still left with 14. So that's an increase of four units of uh of cocoa in Ghana. And um similarly, South Korea um experiences an increase. So the process of trading allows uh product to be produced at the in the best location in this case best location and um for the best price and then then we trade beyond that. So that's when we have uh um absolute advantage. What if we have a country that does everything best? So it is best at producing both cocoa and best at producing rice. So then what happens? So this is a good example. So what if Ghana is still the orange line and South Korea is the green line and Ghana is better at producing um cocoa and it's better at producing rice? Well, what we what we would expect to happen is you produce what you do best and then you allow it the other item to be produced less efficiently in another local. So in this case, I would presume that Ghana is going to produce all of the cocoa and then um South Korea is going to produce the rice and then they're going to share. So let's see if that's how it works out. Okay. So with unrestricted pre free trade um we're going to see that overall world production is greater when we allow even um even with um comparative even with absolute advantage we allow some items to be manufactured outside of the country that has a limit to how much labor it has and so it uh it can't produce everything. So uh better to have the item that they're less efficient at produced elsewhere even if they can produce it more efficiently than the alternative country. Uh this is a very similar example. So um let's see. So South Korea requires 40 units to produce cocoa. Ghana only requires 10. And you can see Ghana requires 10 for cocoa and 13 and a half 13 and a3 for rice. South Korea's 40 for cocoa and 20 for rice. So Ghana um produces both items more efficiently than South Korea, but it only has 200 units of labor altogether. So, uh, Ghana can produce 10 units of cocoa and that would leave seven and a half units of rice. It could produce. South Korea, since it requires 40 units, could only produce 2 and 12 units of of cocoa and then it would have enough left over to do the other $100 units of labor would be five units at 20 to get to the 100. So if we um allowed both countries to produce both items, our total production is going to end up at 12 1/2 units of cocoa and also 12 1/2 units of rice. If we specialize and we we say that well while um Ghana is more efficient at both, it uses fewer units of labor for both, it's even more efficient at producing cocoa. So, let's let South Korea produce all of the rice. And when they do that, if they use all 20 units to produce rice, they're going to be able to produce 10 units of rice. And um when if we use since Ghana only has only uh uh costs 10 units of labor to produce cocoa, we're going to produce 15 units or use 150 of our uh of our 200 units of labor. And we still have a little bit left over. And so we can produce three and three and 3/4 um tons of rice at this price to use up all 200 units of labor. And when we do that, we see that our tilda production has grown to 15 and 1375 from earlier 12 1/2 and 12. So even though uh um Ghana produces everything more efficiently than South Korea, it's still in our best interest. It's still in the overall advantageous for some of the production of rice to occur in South Korea because there's a limit to how much uh labor Ghana has to produce the items that it need it's going to need. And again, if we do the trade um so in this case, we're going to trade four tons of cocoa for four tons of of Korean rice. We still see that we even though Ghana is more efficient at both, the world is better off if we allow some of the production to occur in South Korea because we end up with um with this bottom chart shows that we ended up with an extra ton of uh cocoa um for Ghana and an extra ton and a half in South Korea and we also ended up with extra rice in both loces as well. Now the the challenge with um comparative advantage is it has some pretty restrictive assumptions. It assumes only two countries and two goods. There are no transportation costs. Um the price and value of the product. So the quality of the product would be very similar. Um there's there are resources there's capability of moving uh moving cocoa and rice to freely between the two countries. there's a constant return to scale and then um uh there's there's a set amount of resources in this case 200 units of resources you can't attract additional labor or anything uh and um and there's no effect on income distribution within the countries. These are pretty restrictive assumptions. When you relax those assump ass assumptions, you'll see that there's some uh that that there are definitely still advantages to trade, but it's not as as clear-cut as this appear appears given the very restrictive assumptions. But trading is a good thing and uh um it allows the elevation of countries that have that are still in the developing stage because they're able to produce at low costs and sell their items um around the world. And then the the countries that produce things very efficiently are able to continue to produce their product efficiently.