Lecture Notes: Comparative Advantage in International Political Economy

Introduction

• Video series by Noah Zerbe on key concepts in international political economy.
• Focus of this video: Comparative Advantage.
• Other topics: Gross Domestic Product, Balance of Trade, Key Institutions in Global Economy.

Key Concepts

Absolute Advantage

• Introduced by Adam Smith as a rejection of mercantilism.
• Exists when a country can produce goods more efficiently than another.
• Example: U.S. has absolute advantage in oranges, Canada in maple syrup.
• Specialization and trade increase global production and allow consumption beyond domestic production.

Comparative Advantage

• First articulated by David Ricardo in 1817.
• Countries benefit from trade even if one country has an absolute advantage in both goods.
• Central to understanding international trade.

Opportunity Cost

• Opportunity cost: Cost of the next best alternative given up.
• Important for understanding comparative advantage.

Example: Palau and Kiribati

• Palau: Absolute advantage in both coconuts and fish.
• Kiribati: Can benefit from specialization due to comparative advantage.
• Opportunity cost calculations:
  • Palau: 1 coconut = 1.33 fish; 1 fish = 0.75 coconuts.
  • Kiribati: 1 coconut = 0.5 fish; 1 fish = 2 coconuts.
• Specialization and trade lead to higher consumption beyond production possibility frontiers.
• Total global output increases with specialization and trade.

Assumptions of Comparative Advantage

1. Constant Returns to Scale: No economies of scale assumed.
2. Perfect Mobility of Production Factors: Assumes easy shift of production with no cost.
3. No Transportation Costs: Assumption that trade costs are negligible compared to gains.
4. Free Trade: Assumes no trade barriers like tariffs.

Conclusion

• Comparative advantage supports international trade despite some assumptions not holding in reality.
• Encourages specialization based on relative efficiency.
• Video ends with a brief summary and encouragement to view other series videos for further learning.