Professional Documents
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Business
Fourth Edition
CHAPTER 4
A
10
Figure 4.1
K
B
5
G’ K’
0 5 10 15 20
Rice
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
Theory of Comparative Advantage 4-13
David Ricardo: Principles of Political Economy
(1817).
C
15
Cocoa
A
10
K Figure 4.2
5
B
2.5 K’
G’
0 3.75 5 7.5 10 15 20
Rice
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
4-16
Figure 4.3
G’
0 Rice
The Influence of Free Trade on the
PPF
PPF2
PPF1
Cocoa
Figure 4.4 G’
0 Rice
A Link Between Trade and
Growth
Sachs and Warner: 1970 to 1990 study
Open economy developing countries grew 4.49%/year.
Closed economy developing countries grew 0.69%/year.
Open economy developed countries grew 2.29%/year.
Closed economy developed countries grew 0.74%/year.
160
140
120
100 Other Advanced Countries Exports
80
60
40
20
0 Imports
160
140
120 Developing Countries
100
80
60 Exports
40
20
0 Imports
First-Mover Advantage
• Economies of scale may preclude new entrants.
• Role of the government.
Porter’s Diamond
(Harvard Business School, 1990)
• The Competitive Advantage of Nations.
• Looked at 100 industries in 10 nations.
– Thought existing theories didn’t go far enough.
• Question: “Why does a nation achieve international
success in a particular industry?”
Porter’s Diamond
Determinants of National Competitive
Advantage
Firm Strategy,
Structure and
Rivalry
Related and
Supporting
Figure 4.6
Industries
The Diamond
• Success occurs where these attributes exist.
– More/greater the attribute, the higher chance of success.
• The diamond is mutually reinforcing.
Determinants of
National Competitive Advantage
Chance
Company Strategy,
Structure,
and Rivalry
Two external
factors that Factor Demand
influence the Conditions Conditions
four
determinants.
Related
and Supporting
Industries
Government
Factor Endowments
• Taken from Heckscher-Olin
• Basic factors:
– natural resources
– climate
– location
– demographics
• Advanced factors:
– communications
– skilled labor
– research
– technology
Relationship of Basic to
Advanced Factors
• Basic can provide an initial advantage.
• Must be supported by advanced factors to maintain
success.
• No basics, then must invest in advanced factors.
Demand Conditions
• Demand creates the capabilities.
• Look for sophisticated and
demanding consumers.
– impacts quality and innovation.