Fulbright Economics Teaching Program
2006-2007
Trade: Institutions and impact
Ari Kokko 1
Lecture 1
Ari Kokko
TRADE:
INSTITUTIONS AND IMPACT
Why and how do countries trade?
Outline and schedule
Ari Kokko
Why do countries trade?
•
Get goods and services that cannot be
produced at home
•
To accumulate gold
•
Get cheaper goods and services
•
Efficiency and growth
•
Different theories and policies for different
motives
Fulbright Economics Teaching Program
2006-2007
Trade: Institutions and impact
Ari Kokko 2
Lecture 1
Ari Kokko
Gains from trade:

Laos 100 20

Labor requirements for one unit of output
Ari Kokko
Comparative advantages

Trade is profitable as soon as relative prices
differ between countries

Why are there differences in relative prices?

Classical and neoclassical theory:
– technology differences (Adam Smith 1776 /
David Ricardo 1815)
– differences in factor endowments (Heckscher-
Ohlin 1930)
Fulbright Economics Teaching Program
2006-2007
Trade: Institutions and impact
Ari Kokko 4
Lecture 1
Ari Kokko
Policy conclusions:
neoclassical theory

Free trade and specialization is optimal
 pattern of comparative advantages is given by
nature
 all industries are equally “desirable”


protectionism?
Ari Kokko
Unequal gains from trade
at the micro level
•
Interest groups matter: trade benefits some
groups but hurts others
• trade raises the rewards of a country’s abundant
factor of production and reduces the rewards of
the scarce factor (Stolper-Samuelson theorem)
• the groups that lose may oppose free trade
• the transition to free trade may have
troublesome social consequences