Chapter 2The Law of Comparative Advantage 2.1 IntroductionThe basic questions that we seek to answer in this chapter are: What is the basis for trade and what are the gains from trade? What is the patter of trade? 2.2 The Mercantilists views on trade Mercantilists maintained that the way for a nation to become rich and powerful was to export more than it imported.And they preached economic nationalism, believing that one nation could gain only at the expense of other nations. So national interests were basically in conflict. Question 1 Why did mercantilists view on international trade could be adopted by rulers at that time? Task 1 Read the case study quoted from Thomas Munn Task 2 Finding out the reasons for us to understand Mercantilists view on trade first on page 32. Question 2 Study the case study 2-2 and find out evidence to prove the resurgence of neo mercantilism in todays world trade.2.3 Trade Based on Absolute Advantage: Adam Smith 2.3A Absolute Advantage当一国相对于另一国在某种商品的生产上有更高 的效率（或绝对优势），但在另一种商品生产 上效率较低（或有绝对劣势），那么两国就可 以通过专门生产自己有绝对优势的产品，并用 其中的一部分来交换其有绝对劣势的商品。这 样资源就可以最有效地被利用，而且两种商品 的产出会有很大的增长。When one nation is more efficient than(or has an absolute advantage over) another in the production of one commodity but is less efficient than( or has an absolute disadvantage with respect to) the other nation in producing a second commodity, then both nations can gain by each specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage.By this process, resources are utilized in the most efficient way and the output of both commodities will rise.Adam Smith strongly advocated a policy of laissez-faire as he believed that free trade would cause world resources to be utilized more efficiently and would maximize world welfare.2.3B Illustration of Absolute AdvantageAbsolute Advantage Commodities U.S U.K （产产品）Wheat（bushels/man-hour) 小麦（蒲式耳/劳动劳动 小时时） 6 1 Cloth (yards/man-hour) 布（码码/劳动劳动 小时时） 4 52.4 Trade Based on Comparative Advantage: David Ricardo 2.4 A The Law of Comparative Advantage According to the law of comparative advantage, even if one nation is less efficient than (has an absolute disadvantage with respect to) the other nation in the production of both commodities, there is still a basis for mutually beneficial trade. The first nation should specialize in the production of and export the commodity in which its absolute disadvantage is smaller( this is the commodity of its comparative advantage)and import the commodity in which its absolute disadvantage is greater ( this is the commodity of its comparative disadvantage)比较优势原理：即使一国在两种商品的生产上较 之另一国均出处于绝对劣势（即无绝对优势） ，仍有可能进行互利贸易。一个国家可以专门 生产出口其绝对劣势较小的商品（这是其具有 比较优势的商品）同时进口其绝对劣势相对较 大的商品（这是其具有比较劣势的商品） Commodities U.S U.K （产产品）Wheat（bushels/man-hour) 小麦（蒲式耳/劳动劳动 小时时） 6 1 Cloth (yards/man-hour) 布（码码/劳动劳动 小时时） 4 22.4 B The Gains from Trade The United State would not trade if it received less than 4C for 6W. The United Kingdom would not trade if it had to give up more than 2C for 1W. The United States gains to the extent that it can exchange 6W for more than 4C from the United Kingdom. The United Kingdom gains to the extent that it can give up less than 12C for 6W from the United States. Thus, the range for mutually advantageous trade is 4C 6W 12CThe spread between 12C and 4C( I.e.,8C )represents the total gains from trade available to be shared by the two nations by trading 6W. The closer the rate of exchange is to 4C=6W, the smaller is the share of gain going to the United States. The closer the rate of exchange is to 6W=12C, the greater is the gain of the United States relative to that of the United Kingdom. Question 3 if the rate of exchange is 6W=10C, how should gains be shared by U.S. and U.K.?2.4C Exception to the Law of Comparative Advantage This occurs when the absolute disadvantage that one nation has with respect to another nation is the same for both commodities. Commodities U.S U.K （产产品）Wheat（bushels/man-hour) 小麦（蒲式耳/劳动劳动 小时时） 6 3 Cloth (yards/man-hour) 布（码码/劳动劳动 小时时） 4 22.4D Comparative Advantage with Money (考虑货币的 比较优势 ） Wage rate in U.S. is $ 6 per hour, and in U.K is 1 per hour. In U.S. Pw=$1, and Pc=$1.5 In U.K. Pw= 1, and Pc= 0.5 The exchange rate is 1= $ 2Commodities U.S U.K （产产品） Wheat（bushels/man-hour) 小麦（蒲式耳/劳动劳动 小时时） 6 1 Cloth (yards/man-hour) 布（码码/劳动劳动 小时时）