Lecture 2, 10th Jan.

2019

Trade: voluntary exchange of goods, services, assets or money between one person or
organization and another. (Ideally, mutually beneficial.)

International Trade: trade between residents of different countries.

Why do countries trade?

 Higher quality
 Less expensive products
 More products
 Creates eco-system for other businesses. (Exports spark additional economic activity)

 Canada is more pro-free trade.

Slide 14:
o Why did it jump in 2000s (Red line)?
o Internet
o China enters WTO
o Drop in 2008?
o Great Recession (Financial Crises)
o People aren’t spending that much.
o Focus on your economy instead of
trade
o Access to capital dried up.
o Fear of exposure, uncertainty
o Countries could have said: I’ll focus
on my economy. But economies were linked.
Theories
 Early-country Based Theories
o Products that primarily focus on price: Commodities
o Inter-industry trade
 Firm based:
o Quality, everyone likes it: Differentiated goods
o Intra-industry trade
Country based Theories
1) Mercantilism
 We want as much as gold and silver as possible
 Local market serving local.
 Import as little as possible, export as much as possible
 People in power gains
 The companies who focus on the local market gains: no competition from outside
 Exporting companies gain
 Protected market
 Rarely everybody wins
 Overall things get better (Not a zero-sum game)
 Pie will grow but the distribution changes
 Protectionists- Neo-mercantilists
  Barriers dropped, how dropped too much
2) Absolute Advantage
 I focus on what I do best and you do what you do best and then we will trade.
(Specialization)
 Adam Smith
3) Comparative advantage
 Opportunity cost, there is a cost for doing something.
 David Ricardo.
 You are a superstar at everything but I am relatively better doing blah relatively
4) Relative Factor Endowments
 Intellectual capital, Land, Labor, Capital
 You focus on your resource abundant industry.
 Oil, lumber, water, minerals for Canada.
 Let’s test this theory: WW1
o Focus on capital-intensive ones (Takes time to grow those industries)
o Heckscher-Ohlin: Leontief Paradox, we tested it not working dude.
Firm-Based Theories
1) Linder’s Country Similarity Theory
 If countries have similar per capita income; they are more likely to trade.
 1961
 Cars in US, they were built in US
 If they open up their borders to the car industry, companies need to gain and
consumers need to gain.
 Incentives: set up a situation where everyone gains.
 Easier for companies too. Product doesn’t have to change that much
2) New trade theory
 We are going to open our borders, so that competition can happen
 Companies gain because access to new markets, consumers gain because new
products (maybe cheaper)
 Innovative business
 Unilever, Proctor and Gamble example
FDI
1) Foreign Portfolio Investment
 Passive investment
 Amazon worth the most in this day, buy
shares, you don’t get to control the business
 No decision making
2) FDI
 Active investment
 Have decision making ability.
 I am a company; I am opening a factory in
another country
 2002 big jump! (Western Europe, US)
i. Exponential curve FDI abroad for US
ii. Green: FDI from US
FDI can be good!
 Supply, Demand and Political Factors
1) Avoiding Trade Barriers
a. We make cars, in Germany, sell to US. We want it manufactured in US.
Tariffs up. (Tax to ship)
b. You can make it in the country no worry for tax.
2) Economic development Incentives
a. Government regulation in government decisions
b. We want you here, we will give you money to invest here, incentivize
here. Subsidies…
c. Montreal: big place for games, development incentives for Quebec,
worked
d. Riverdale, Flash, Why shoot in Vancouver?
i. Cheaper, tax credits