Lecture 3

Linder’s Country Similarity Theory

 Countries should reduce barriers for similar capita income countries.
 50-60s Germany, car industry
 Differentiated goods
 Intra-industry
New Trade Theory
 Open up the markets to grow more, more efficient, more jobs
 Economies of scale
 Get more, and better products
 Everyone benefits
 More competition
FPI vs FDI
 Direct: you can have decisions, partnership, power
 Portfolio: passive investment, stock, lending money
FDI decisions:
1. Avoidance of Trade Barriers
2. Economic Development Incentives
a. Tax breaks, subsidies
Math:
Slide 23
 France can make 2 wines OR 3 clock radios per hour
o France Absolute Advantage: Wine
 Japan can make 1 wine OR 5 clock radios per hour
o Japan Absolute Advantage: Clock radios
Q2:
-1 hour+ 1 hour 20 mins= 20 mins
How much time does Japan save?
-48 mins + 2 hours = 72 mins
Q3:
France Japan
Wine 2 2
Clock 4 6

Comparative Adv.
Q1:
France focus on Wine and Japan focus on clock
Although, France has an absolute advantage for both.
1:4 = 0.25
5:6= 0.83 
Opportunity cost method:
France Japan
1 W: 1.5 CR 1 W: 5 CR
0.67 W: 1 CR 0.2W: 1 CR
France has a lower opportunity cost for wine.
Japan has a lower opportunity cost for clock radios.
1.5 hours on Wine+ 0.5 hour on CR for FRANCE
1.5 hours on CR + 0.5 hour on Wine for JAPAN
France Japan
Wine 6 0
Clock 3 10

After trade: BOTH SIDES WIN.

France Japan
Wine 4 2
Clock 7 6

Q3:
France Japan
Wine 4 1
Clock 6 5

Hourly wage: 12 euros for France

8 euros for Japan

France Japan

Home Import Import Home

Wine 3 euros 8 euros 375yen 1000 yen

Clock 2 euros 1.6 euros 250 yen 200 yen

12:4 = 3
These are all commodities. All wines and clock radios are the same.