THEORIES OF

INTERNATIONA
L TRADE

With regard to international commerce, major theories have been

developed, with the classical theory and its refinement being
particularly famous and important. These ideas attempt to answer
three types of questions.

The first is concerned with the factors that allow trade to occur.

The second set of issues revolves on how commerce is financed.

The third is concerned with the benefits of trading and how these
benefits are distributed across trading countries.

THEORIES OF
INTERNATIONAL TRADE

The first theorem, referred to as the Theory of Comparative

Advantage Costs, describes the circumstances under which trade
will take place.

The price specie-flow theory, or the second theorem, describes

how payments across national currency systems are made.

The theory of reciprocal demand is the third theorem to which

Mill gave the label of the theory of interna value. It explains how
the conditions of trade are determined and how the profits from
commerce are distributed across nations.

WHAT IS COMPARATIVE
ADVANTAGE AND HOW DOES
IT WORK?

The capacity of an economy to produce a certain item or service at a lower

opportunity cost than its trade rivals is known as comparative advantage. A
comparative advantage allows a firm to sell goods and services at a cheaper
cost than its competitors while maintaining higher profit margins.

Although the rule of comparative advantage is widely credited to English

political economist David Ricardo and his book "On the Principles of Political
Economy and Taxation," published in 1817, it is more likely that the analysis
was developed by Ricardo's mentor, James Mill.

COMPARATIVE ADVANTAGE:
AN OVERVIEW
One of the most significant notions in economic theory is
comparative advantage, which is a central premise of the argument
that all players, at all times, may profit from cooperation and
voluntary trade.

It is also a fundamental premise in international commerce theory.

A firm knowledge of opportunity cost is essential to

comprehending comparative advantage. Simply put, an opportunity
cost is the potential gain that someone foregoes when they choose
one choice over another.

In the situation of comparative advantage, one company's

opportunity cost (that is, the potential gain that has been foregone)
is smaller than another's. This sort of advantage is held by the firm
with the lowest opportunity cost, and hence the least potential gain
that was lost.

Comparative advantage can also be thought of as the best choice

given a trade-off. When comparing two distinct options, each of
which has a trade-off (some benefits and some drawbacks), the one
with the comparative advantage has the greatest overall package.

DIVERSITY OF SKILLS

Wages teach people about their comparative advantages. This motivates people
to pursue the occupations in which they excel. If a talented mathematician
earns more money as an engineer than as a teacher, they, as well as everyone
they trade with, benefit from engineering.

By more effectively arranging labor, larger gaps in opportunity costs allow for
higher levels of value creation. The more people and skills variety there is, the
more opportunities for advantageous commerce through comparative
advantage.

Consider the case of a well-known athlete such as Michael Jordan.

Michael Jordan, a well-known basketball and baseball player, is a
gifted athlete whose physical abilities much exceed those of most
others. Michael Jordan, thanks to his talents as well as his amazing
height, would most certainly be able to paint his house fast.

Assume Michael Jordan could paint his entire house in eight hours.
He might, however, use those same eight hours to participate in the
filming of a television commercial, which would pay him $50,000.
Jordan's next-door neighbor Joe, on the other hand, could paint the
home in ten hours. He might earn $100 working in a fast food
restaurant in the same amount of time.
Even if Michael Jordan could paint the home faster and better, Joe
has a comparative advantage in this case. Michael Jordan filming a
television commercial in exchange for Joe painting his house would
be the finest deal. The deal is a gain as long as Michael Jordan
receives the promised $50,000 and Joe earns more than $100.
Michael Jordan and Joe would likely find this to be the greatest
arrangement for their mutual benefit due to their diverse skill sets.

ABSOLUTE ADVANTAGE VS.

COMPARATIVE ADVANTAGE

Absolute advantage is in contrast to comparative advantage. The capacity to

create more or better products and services than others is referred to as
absolute advantage. The capacity to create goods and services at a lower
opportunity cost, not necessarily at a higher volume or quality, is referred to as
comparative advantage.

Consider an attorney and their secretary to illustrate the difference. The

attorney is a faster typist and organizer than the secretary and is better at
supplying legal services. In this situation, the attorney has an unbeatable edge
in both legal services output and secretarial labor.

Despite this, trade benefits them because of their comparative advantages and
drawbacks. Assume that the attorney charges $175 per hour for legal services
and $25 for secretarial services. In an hour, the secretary can provide 0 legal
services and $20 in secretarial services. The function of opportunity cost is
critical here.

The attorney must lose $175 in revenue by not practicing law in

order to earn $25 from secretarial employment. Secretarial
employment has a significant opportunity cost for them. They
would be better off generating an hour of legal services and
employing a secretary to type and arrange them. The secretary
would be far better off typing and arranging for the attorney
because the opportunity cost is minimal. It's where they have a
competitive advantage.

COMPARATIVE ADVANTAGE VS.

COMPETITIVE ADVANTAGE

A company's, economy's, country's, or individual's capacity to

deliver a higher level of value to customers than its competitors is
referred to as a competitive advantage. It's comparable to
comparative advantage, but it's not the same thing.

It is necessary to achieve at least one of three things in order to gain

a competitive advantage over others in the same field or area:
the company must be the lowest-cost provider of its goods or
services,

it must offer superior goods or services than its competitors, and/or

it must focus on a specific segment of the consumer pool.

COMPARATIVE ADVANTAGE IN
INTERNATIONAL TRADE

David Ricardo famously demonstrated how specialization and

trade according to comparative advantages benefits both England
and Portugal. Portugal was able to produce wine at a low cost,
whereas England was able to produce fabric at a low cost in this
situation. Ricardo anticipated that each country will ultimately
acknowledge these truths and quit striving to produce the more
expensive goods.

Indeed, England ceased making wine and Portugal stopped

making fabric as time passed. Both countries realized that it was
in their best interests to stop producing these products at home
and instead trade with one another to obtain them.

A recent example is China's comparative advantage over the US in

the form of low-cost labor. Simple consumer items are produced in
China at a significantly lower opportunity cost. In specialized,
capital-intensive work, the United States has a competitive edge. At
lower opportunity costs, American labor generate sophisticated
goods or investment possibilities. Specializing and trade in certain
areas are mutually beneficial.

Protectionism is generally ineffective, according to the idea of

comparative advantage. Followers of this analytical method assume
that nations involved in international commerce will have
previously sought out partners with comparative advantages.

If a country withdraws from an international trade agreement, if a

government applies tariffs, and so on, it may result in new
employment and industries being created locally. This is not,
however, a long-term solution to a trade problem. That country will
eventually find itself at a disadvantage in comparison to its
neighbors, who are already better equipped to produce these
products at a lower opportunity cost.

PRICE SPECIE THEORY

Under the gold standard, the price–specie flow mechanism is a model created
by Scottish economist David Hume (1711–1776) to show how trade
imbalances may self-correct and adapt. In Of the Balance of Trade, which he
published to oppose the Mercantilist view that a nation should seek for a
positive balance of trade, Hume elaborated on his thesis (i.e., greater exports
than imports). In other words, the "rise in local prices due to the gold inflow
would discourage exports while encouraging imports, thereby restricting the
amount by which exports exceed imports."In a letter to Montesquieu in 1749,
Hume described the mechanism for the first time.

DAVID HUME (1711–1776)

David Hume devised the

price-specie flow mechanism
to describe how trade
imbalances may be
automatically corrected under
the gold standard. The model's
initial version assumes that
only gold coins are circulating
and that the function of the
central bank is minor.

When a country on the gold standard has a positive balance of

trade, according to Hume, gold will flow into the country in the
amount that exports exceed imports. When a country's trade balance
is negative, gold will flow out of the country in the amount that
imports exceed exports.

As a result, the money supply would grow in a nation with a

positive balance of trade and decline in a country with a negative
balance of trade in the absence of any balancing steps by the central
bank on the quantity of money in circulation (known as
sterilization).

Hume claimed that nations with a rising money supply would suffer
inflation as prices of goods and services increased, while those with
a decreasing money supply would experience deflation as prices of
goods and services decreased, using a theory known as the quantity
theory of money.

Higher prices would lead exports to fall and imports to rise in

nations with a positive trade balance, shifting the balance of trade
downwards towards a neutral balance.

Lower prices, on the other hand, would lead exports to rise and
imports to fall in nations with a negative trade balance, bringing the
balance of trade closer to neutral.

These changes to the balance of trade will continue until all nations
engaged in the exchange have a zero balance of trade.

WHAT IS THE GOLD STANDARD?

The gold standard is a monetary system in which the value of a

country's currency or paper money is closely tied to the value of
gold. Countries agreed to convert paper money into a set quantity of
gold under the gold standard. A country that adheres to the gold
standard establishes a fixed gold price and buys and sells gold at
that price. The value of the currency is determined by that set price.
If the United States sets the price of gold at $500 per ounce, the
dollar is worth 1/500th of an ounce of gold.

No government presently employs the gold standard. The United

Kingdom abandoned the gold standard in 1931, and the United
States followed suit in 1933, eventually abandoning the system
entirely in 1973. 1 and 2 The gold standard was entirely replaced by
fiat money, which is a word for currency that is utilized as a form
of payment because of a government's command, or fiat, that it
must be accepted. The dollar is fiat money in the United States, and
the naira is fiat money in Nigeria.

The attractiveness of a gold standard is that it removes control of money

supply from the hands of fallible humans. A community can adopt a simple
guideline to prevent the ills of inflation by using the physical quantity of gold
as a limit on that issuance. The objective of monetary policy is to assist foster a
stable monetary environment in which full employment may be reached, as
well as to prevent inflation and deflation. A quick look at the history of the US
gold standard demonstrates that while inflation may be prevented by following
such a basic rule, rigid adherence to that rule can lead to economic instability,
if not political turmoil.

WHAT IS FIAT MONEY, AND

HOW DOES IT WORK?

Fiat money is government-produced money that isn't backed by a

tangible asset like gold or silver, but rather by the government that
created it. Fiat money's value is determined by the connection
between supply and demand as well as the stability of the issuing
government, rather than the value of the underlying commodity.
The majority of current paper currencies, including the US dollar,
the euro, and other major global currencies, are fiat currencies.

TAKEAWAYS IMPORTANT

A government-issued currency that is not backed by a commodity such as gold

is known as fiat money.
Because central banks can regulate how much money is created with fiat
money, they have more power over the economy.

The majority of current paper currencies, including the United States dollar,
are fiat currencies.

One risk with fiat currency is that governments will create too much of it,
leading to hyperinflation.

THE FIAT SYSTEM VS. THE

GOLD STANDARD

The gold standard, as the name implies, is a monetary system in which the
value of currency is determined by gold.

A fiat system, on the other hand, is a monetary system in which currency value
is not based on any physical commodity and is instead permitted to fluctuate
dynamically against other currencies on the foreign exchange markets.

The word "fiat" comes from the Latin word "fieri," which means "arbitrary
deed or decision." The value of fiat currencies is ultimately dependent on the
fact that they are designated as legal currency by government edict, in keeping
with their etymology.

International commerce was conducted on the basis of the so-called

classical gold standard in the decades leading up to the First World
War.

Physical gold was used in this method to settle commerce between

nations. Gold was amassed as payment for exports by countries
with trade surpluses.

Countries with trade deficits, on the other hand, saw their gold
reserves fall as gold flowed out as payment for imports.

THEORY OF RECIPROCAL
DEMAND

Reciprocal demand is a process of international demand and supply interaction

that is required to achieve international price equilibrium.

John Stuart Mill first proposed this concept in 1873, and Alfred Marshall
expanded on it.

According to the idea, the real price at which trade takes place is determined
by the interacting wants of the trading parties.

The idea operates in a similar way to other markets' demand and supply
patterns. As a result, if demand in world markets does not equal supply, the
worldwide price will fluctuate until demand and supply are equal.

As a result, the demand and supply for products determine whether terms of
trade are equalized.

It is used to express a country's desire for a certain item in terms of

the amounts of other commodities it is willing to forego in return.

The conditions of trade, which define each country's proportional

share, are determined by reciprocal demand.

Equilibrium would be reached when the exchange rate between the

two commodities is such that the quantities requested by each
country of the commodity it imports from the other is exactly
enough to pay for the other.

In the previous tutorial, we learned about specialization, which is when an individual,

0:12
company, or country specializes in producing one thing or one part of a task, and relies on
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others to produce everything else or complete the other parts of the task. We also learned about why
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specialization is so important. This is because it leads to more efficiency, higher
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productivity and higher standards of living. To better illustrate this, in this tutorial we are
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going to look at the difference between absolute advantage and comparative advantage. Absolute
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advantage means a person or nation can produce more of something than another person or nation
0:50
using the same amount of resources. Comparative advantage, on the other hand, means a person or
0:56
nation can produce something most efficiently given all the products it could potentially
1:02
produce. This considers the opportunity cost of producing one good over another. In other words,
1:10
comparative advantage is the circumstance in which an entity gives up comparatively less, or has a
1:17
lower opportunity cost, than some other entity, when making the same amount of the same product.
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First, let’s look more closely at absolute advantage. Say you have two people,
1:29
Harry and Lloyd. They are both carpenters, and to keep things simple at first, let’s say they both
1:35
build rocking chairs. If Harry can build two chairs in a day and Lloyd can only build one,
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it is certainly the case that Harry has an absolute advantage over Lloyd.
1:46
Of course in the real world things are rarely this simple. So now to make things a little trickier,
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let’s say Harry and Lloyd are both carpenters who build tables and birdhouses. In one day,
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Harry can make either three birdhouses or one table. Lloyd can make either two birdhouses
2:06
or one table per day. Based on this information, we know that Harry is more productive than Lloyd
2:13
in making birdhouses. In economic terms, time is the limited resource, and Harry has an absolute
2:20
advantage over Lloyd, because he can make one more birdhouse given the same amount of time.
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Now, let’s look more closely at comparative advantage with the same example. Again,
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Harry can make three birdhouses or one table. Lloyd can make two birdhouses or one table. For
2:40
comparative advantage, we need to figure out what makes more sense for Harry and Lloyd to produce.
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In order to do that, it is useful to compare opportunity costs. Harry sacrifices three
2:53
birdhouses for every table he produces. So, the opportunity cost of making one table is three
2:59
birdhouses, the three birdhouses he could have built in the time it takes him to build one table.
3:05
And the opportunity cost of making one birdhouse is 1/3 of a table. Now let’s look at Lloyd.
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The opportunity cost of Lloyd making one table is just two birdhouses, while the opportunity cost
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of Lloyd making one birdhouse is 1/2 of a table. According to the law of comparative advantage,
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each person should produce the good for which there is a lower opportunity cost
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than other producers. Harry’s opportunity cost for making one birdhouse, one third of a table,
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is lower than Lloyd’s opportunity cost for making one birdhouse, one half of a table. Therefore, it
3:46
makes more sense for Harry to make birdhouses. And this works out well for Lloyd, too. It looks like
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Lloyd’s opportunity cost for making one table, two birdhouses, is lower than Harry’s opportunity cost
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for making one table, three birdhouses. Therefore, it makes more sense for Lloyd to make tables.
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If Harry focuses on birdhouses and Lloyd makes tables, they will end up with three birdhouses
4:13
and a table at the end of the day, as opposed to two birdhouses and one table if they were to swap.
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Now with this very simplistic example understood, let’s apply absolute advantage and comparative
4:26
advantage to entire countries. Suppose two countries, Country A and Country B,
4:32
are able to produce both coffee and sugar. However, Country A’s climate and soil are such
4:39
that it can more easily produce coffee, making two tons of coffee per hour as opposed to only one ton
4:46
of sugar per hour. Country B’s climate and soil are such that it can more easily produce sugar,
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making three tons of sugar per hour as opposed to just one ton of coffee per hour. Therefore,
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we can say that Country A has an absolute advantage producing coffee,
5:04
and Country B has an absolute advantage producing sugar. But now, let’s look at a more accurate
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way to conceptualize specialization, which is through their relative comparative advantage.
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For Country A, the opportunity cost of one ton of coffee is a half a ton of sugar. For Country B,
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the opportunity cost of one ton of coffee is three tons of sugar. Since Country A has a
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lower opportunity cost than Country B, Country A has a comparative advantage in producing coffee.
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Now, let’s look at producing sugar. For Country A, the opportunity cost of one ton of sugar
5:45
is two tons of coffee. For Country B, the opportunity cost of one ton of sugar
5:50
is one third of a ton of coffee. Country B has the lower opportunity cost, and therefore
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has the comparative advantage in producing sugar. So hypothetically, Country A should
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be exporting coffee to Country B, and Country B should be exporting sugar to Country A.
6:10
What we have just demonstrated is an economic concept known as interdependence. Interdependence
6:16
is the shared need of countries for the resources, goods, services, labor, and knowledge supplied by
6:25
other countries. Because of interdependence, a drought in Guatemala that diminishes their
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coffee crop might mean more expensive coffee the next time you visit your favorite artisanal coffee
6:37
shop. Perhaps this shop would turn to another country that produces coffee, like Brazil,
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to get its coffee beans in order to avoid raising prices. In any case, this is just one example of
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interdependence, which illustrates how many of the economies in the world are intimately connected.

almost 2600 years ago the first gold

0:03
coins were minted and used for trade
0:05
later on people started storing their
0:07
gold in well-guarded vaults and bought
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goods and services using the receipts
0:11
given to them by those running the
0:13
vaults pieces of paper they could always
0:15
exchange for real gold
0:17
that's how paper money first appeared
0:19
and things of all from there
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initially most currencies were pegged to
0:24
gold directly as the name gold standard
0:26
suggests people could walk into a bank
0:29
and exchange a piece of paper money to
0:31
gold after 1945 however this changed
0:34
currencies were pegged to the dollar
0:36
which was pegged to gold at a rate of
0:38
$35 per ounce individuals were no longer
0:42
allowed to exchange paper money to gold
0:43
but central banks were however countries
0:47
such as France ended up no longer
0:48
trusting the US dollar and started
0:51
converting their dollars to physical
0:52
gold the gold reserves of the US were
0:55
getting depleted quickly so President
0:57
Nixon stopped allowing that he took the
0:59
United States and thereby the world off
1:02
anything even resembling a gold standard
1:04
in 1971 at this point the money we used
1:08
isn't backed by anything tangible fiat
1:10
currencies as they're called are
1:12
basically backed by confidence the
1:15
dollar is backed by the confidence
1:16
people have in the US the British Pound
1:19
by people's confidence in the UK and so
1:21
on the value of one currency compared to
1:24
another
1:24
therefore fluctuates continuously
1:26
confidence driven supply and demand if
1:29
you will

If you tried to pay for something with a piece of paper,

0:09
you might run into some trouble.
0:11
Unless, of course, the piece of paper was a hundred dollar bill.
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But what is it that makes that bill so much more interesting and valuable
0:18
than other pieces of paper?
0:20
After all, there's not much you can do with it.
0:23
You can't eat it.
0:25
You can't build things with it.
0:26
And burning it is actually illegal.
0:29
So what's the big deal?
0:30
Of course, you probably know the answer.
0:33
A hundred dollar bill is printed by the government
0:35
and designated as official currency,
0:37
while other pieces of paper are not.
0:40
But that's just what makes them legal.
0:42
What makes a hundred dollar bill valuable, on the other hand,
0:45
is how many or few of them are around.
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Throughout history, most currency, including the US dollar,
0:51
was linked to valuable commodities
0:53
and the amount of it in circulation
0:55
depended on a government's gold or silver reserves.
0:59
But after the US abolished this system in 1971,
1:01
the dollar became what is known as fiat money,
1:05
meaning not linked to any external resource
1:08
but relying instead solely on government policy
1:11
to decide how much currency to print.
1:13
Which branch of our government sets this policy?
1:16
The Executive, the Legislative, or the Judicial?
1:19
The surprising answer is: none of the above!
1:22
In fact, monetary policy is set by an independent Federal Reserve System,
1:26
or the Fed,
1:28
made up of 12 regional banks in major cities around the country.
1:32
Its board of governors,
1:33
which is appointed by the president and confirmed by the Senate,
1:37
reports to Congress,
1:38
and all the Fed's profit goes into the US Treasury.
1:41
But to keep the Fed from being influenced
1:43
by the day-to-day vicissitudes of politics,
1:45
it is not under the direct control of any branch of government.
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Why doesn't the Fed just decide to print infinite hundred dollar bills
1:52
to make everyone happy and rich?
1:54
Well, because then the bills wouldn't be worth anything.
1:56
Think about the purpose of currency,
1:59
which is to be exchanged for goods and services.
2:01
If the total amount of currency in circulation
2:04
increases faster than the total value of goods and services in the economy,
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then each individual piece will be able
2:10
to buy a smaller portion of those things than before.
2:13
This is called inflation.
2:15
On the other hand,
2:16
if the money supply remains the same,
2:18
while more goods and services are produced,
2:20
each dollar's value would increase
2:22
in a process known as deflation.
2:24
So which is worse?
2:26
Too much inflation
2:27
means that the money in your wallet today will be worth less tomorrow,
2:31
making you want to spend it right away.
2:33
While this would stimulate business, it would also encourage overconsumption,
2:37
or hoarding commodities, like food and fuel,
2:39
raising their prices
2:41
and leading to consumer shortages and even more inflation.
2:45
But deflation would make people want to hold onto their money,
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and a decrease in consumer spending
2:51
would reduce business profits,
2:52
leading to more unemployment and a further decrease in spending,
2:55
causing the economy to keep shrinking.
2:58
So most economists believe that while too much of either is dangerous,
3:01
a small, consistent amount of inflation is necessary to encourage economic growth.
3:07
The Fed uses vast amounts of economic data
3:10
to determine how much currency should be in circulation,
3:13
including previous rates of inflation,
3:15
international trends, and the unemployment rate.
3:18
Like in the story of Goldilocks,
3:20
they need to get the numbers just right
3:22
in order to stimulate growth and keep people employed,
3:24
without letting inflation reach disruptive levels.
3:27
The Fed not only determines
3:29
how much that paper in your wallet is worth
3:32
but also your chances of getting or keeping the job
3:34
where you earn it.
to explain why countries trade we must
0:05
look at a little economic theory the
0:08
first concept will consider is called
0:11
the theory of absolute advantage if a
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country has the absolute advantage in
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the production of a good or service it
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means it's the most efficient producer
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of that product in other words if all
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countries use the same inputs in their
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production process this country would be
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able to make more better quality
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products than all the others let's
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construct a simplified theoretical
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example to illustrate the point imagine
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for a moment that we live in a world
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where there are only two countries South
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Africa and Japan now both countries have
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differing capabilities to produce two
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products wheat and DVDs now over a
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certain time period South Africa can
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either produce fifty five bags of wheat
1:01
or eleven DVDs using all their resources
1:04
Japan on the other hand can either
1:06
produce 18 bags of wheat or 72 DVDs
1:10
using all the available inputs that they
1:12
have so knowing that each country must
1:15
choose how to allocate its resources
1:16
between the production of these two
1:18
goods does it make sense for South
1:21
Africa to produce any DVDs the answer is
1:26
no japan is obviously much more
1:30
efficient in the production of dvds than
1:32
south africa while south africa is much
1:35
more efficient in the production of
1:37
wheat than japan but both countries need
1:41
both products so it makes sense for
1:44
South Africa to provide Japan with South
1:46
African grown wheat in exchange for DVDs
1:49
made in Japan if each country
1:52
concentrates on producing what it's
1:54
naturally good at if they specialize in
1:56
that good both countries can then trade
1:59
with each other and end up with more of
2:01
both products and if they try to produce
2:03
it all themselves the consumers in both
2:07
countries also benefit because they will
2:09
be buying products made by the most
2:11
efficient producer
2:13
and according to the economic theory it
2:15
means that the price paid for these
2:17
products should be the cheapest why well
2:21
because the producers making the two
2:24
products are the most efficient at it
2:25
and can make more of the product for
2:27
less than their competitors remember
2:30
that as a consumer you will not buy the
2:33
same product from a seller who's more
2:35
expensive so the economic principle of
2:38
absolute advantage is that you should
2:41
specialize in the production of
2:42
something that you're good at making you
2:44
will be efficient in the production of
2:47
that good or service and the price you
2:49
sell at will be the most competitive now
2:52
why is this considered so important in
2:55
economics well remember economics is all
2:58
about satisfying unlimited wants and
3:01
needs how can we get all of the things
3:03
we want with such limited resources
3:05
resources we really can't afford to
3:08
waste through inefficient production
3:11
ok let's try and take the theory a bit
3:15
further according to this new table we
3:18
assume that South Africa has an absolute
3:20
advantage with both products it can
3:23
efficiently produce either wheat or DVDs
3:27
looking at this new data it would seem
3:30
that there is no longer any reason for
3:31
trade between these two countries but
3:34
this is not quite true let's see why
3:37
remember that each country must decide
3:39
how to allocate its resources in a
3:42
simplified example will say that if
3:45
South Africa concentrates all of its
3:47
resources on DVD production it can make
3:49
8 DVDs but this means losing out on the
3:53
wheat and if they focus all their
3:55
efforts on wheat production they can
3:57
produce 40 bags while sacrificing any
4:00
DVD production the best way to help
4:04
South Africa decide how to allocate
4:05
resources is to calculate how much it
4:08
cost to make one DVD
4:10
comparatively how much wheat the South
4:13
Africa have to give up to make one DVD
4:16
it's not too tricky
4:18
divide 40 by 8 which gives us 5
4:21
so for each DVD we produce we could have
4:23
grown five bags of wheat in other words
4:27
each DVD we make cost South Africa five
4:30
bags of wheat now over in Japan if they
4:34
choose to produce four DVDs they can't
4:37
produce any wheat because of their
4:39
limited resources and if they focus on
4:42
just producing the eight bags of wheat
4:43
there's nothing left for DVD production
4:46
doing the maths eight divided by four we
4:50
can see that it will cost Japan two bags
4:52
of wheat to make one DVD so comparing
4:57
the cost of production in both countries
4:58
South Africa has to give up five bags of
5:02
wheat for each DVD it makes while in
5:04
Japan it only costs two bags of wheat to
5:08
make one DVD so DVDs cost more in terms
5:12
of bags of wheat given up in South
5:14
Africa than they do in Japan or in less
5:17
clumsy language it's cheaper for Japan
5:19
to make DVDs so Japan should make the
5:22
DVDs and it also makes sense that South
5:25
Africa should produce the wheat and that
5:28
the theory of comparative advantage
5:33
remember don't let the numbers confuse
5:35
you they're just used to help us
5:37
understand the theory if you need to

Why did the United States leave the gold standard? Basically, because the gold standard constrained the
federal government.
0:09
I get a lot of questions from students about the gold standard. For example, what is it?
0:14
And why don't we have one anymore? I will start by explaining what it is. Under a gold
0:19
standard, the monetary unit is defined as a certain amount of gold, like 1/20 of an
0:24
ounce, or 10 grams. In the era of the international gold standard, before World War I, the U.S.
0:31
dollar was defined as a little less than 1/20 of an ounce of gold. To be precise, one ounce
0:36
of gold equaled $20.67.
0:39
A silver standard follows the same idea. The British monetary unit, the pound sterling,
0:45
originally meant exactly that: one pound of sterling silver. A gold standard can operate
0:50
with or without government involvement in the minting of gold coins, the issuing of
0:54
gold-backed paper currency, and the provision of gold-backed checking accounts. Historically,
0:59
private mints and commercial banks were reliable providers of gold-denominated moneys.
1:04
Thanks to the banks, a gold standard doesn't mean that people have to carry around bags
1:08
of gold coins. Anyone who finds paper currency and checking accounts more convenient can
1:13
use those. But it does mean that if a person wants to redeem a bank's $20 bill or cash
1:19
its $20 check, the bank is obliged to give him a $20 gold coin. The obligation to redeem
1:25
for gold guarantees the gold value of all kinds of bank-issued money. And the purchasing
1:31
power of gold was historically very stable. By contrast, under today's unbacked, or fiat,
1:37
dollar standard, there is no value guarantee. If you take a $20 Federal Reserve note to
1:42
a bank, all you can get for it is other Federal Reserve notes. The experience with fiat moneys
1:47
in various countries has ranged from mild inflation to terrible inflation.
1:52
Why did the United States leave the gold standard? Basically, because the gold standard constrained
1:56
the federal government. The obligation to redeem in gold limited money printing at times
2:01
when the federal government, rightly or wrongly, thought more money printing would be a good
2:06
idea. The United States went off the gold standard in two major steps. First, in the
2:12
1930s, under President Franklin Roosevelt, the federal government broke its promise to
2:16
redeem Federal Reserve notes in coin for U.S. citizens.
2:20
Private ownership and use of gold coins were actually outlawed. Individuals and banks were
2:24
ordered to turn in their gold coins and bullion to the Federal Reserve. In the late 1960s
2:29
and early 1970s the Fed printed dollars rapidly. The falling purchasing power of the dollar
2:34
triggered redemptions by foreign central banks, and the U.S. government began running out
2:38
of gold. Rather than stop printing dollars, Nixon ended their redeemability in 1971. The
2:45
money printing then accelerated, culminating in double-digit inflation around 1980. By
2:50
contrast, inflation under the classical gold standard was never in double digits and averaged
2:54
only 0 to 1 percent per year over the long term.
2:58
A common objection to a gold or silver standard is that there can be random shocks to the
3:02
supply or demand curves for metal and that these will make the purchasing power of metallic
3:07
money unstable. But historically this was not much of a problem. For example, after
3:12
the major supply shock of the California gold rush of 1849, as the gold dispersed over the
3:18
entire world, the resulting inflation was less than 1.5 percent per year for about eight
3:23
years. Thereafter the price level leveled off and later gradually declined as the world
3:29
output of goods grew faster than the stock of gold. Under our current fiat standard,
3:34
the supply of money is up to the decisions of the Federal Open Market Committee. There
3:38
is no self-correcting market tendency to prevent the creation of too much money under that
3:43
system. The fate of the dollar rests with a handful of political appointees.
3:48
The practical question is under which system are the quantity and purchasing power of money
3:52
more stable. In other words, which system better limits inflation? The answer to that
3:57
question is clear from the historical record. Gold and silver standards have dramatically
4:02
outperformed fiat standards around the world in providing stable, low-inflation currency.

this video shows why the price has

0:15
changed for agricultural products many
0:18
factors influence the price of an
0:20
agricultural commodity a market can be
0:24
thought of as a scale on the left side
0:27
of the scale we see farmers growing
0:29
maize and storing it in their houses
0:31
after harvest this represents the
0:35
production or supply side on the right
0:38
side we see people eating the maize this
0:42
represents the consumption or demand
0:44
side the harvested maize is transported
0:48
from the farmers side to the consumers
0:50
side we notice that supply and demand
0:53
are in balance and the indicator for the
0:55
maize price marks 100 units for each bag
0:58
of maize now we observe what happens
1:01
when the people continue to consume the
1:03
maize while the farmers have not
1:05
produced any new maize yet the scale
1:08
gets out of balance the maize price goes
1:11
up to 125 units per bag prices go up
1:16
when supply is lower than the demand we
1:20
call this situation under supply as it
1:24
rains the farmers grow maize when they
1:28
harvest it the price goes down to 75
1:31
units per bag because of an oversupply
1:34
people continue to eat the maize which
1:37
reduces the oversupply of the crop as
1:40
supply and demand become equal the price
1:43
goes back to 100 units per bag a new
1:47
growing season of maize arrives and it
1:49
doesn't rain much so the maize harvest
1:51
is poor maize consumption continues
1:54
steadily but there was not enough maize
1:57
harvested to meet the demand the maize
1:59
price increases to 200 units per bag
2:03
since the price of maize is high some
2:06
people decide to invest in maize farming
2:09
next season the maize harvest has
2:12
increased due to more maize farmers
2:15
due to this strong oversupply of maize
2:18
the price goes down from 200 units per
2:21
bag to 75 units per bag now we notice
2:25
some changes on the demand side a maize
2:28
factory is built to produce animal feed
2:31
the animal feed factory buys a lot of
2:34
maize and causes the maize price to go
2:37
up to a hundred and fifty units per bag
2:39
a trader decides to buy cheap maize from
2:43
a neighboring country and sell it in his
2:45
own country
2:46
this extra supply of maize causes the
2:49
price to level out between both
2:51
countries now we notice that some rice
2:54
traders come from overseas and offer
2:57
rice to the local maize consumers who
2:59
are happy to buy the cheap rice because
3:01
maize is expensive some maize consumers
3:05
become rice consumers this causes less
3:08
demand for maize because they now
3:10
consume rice many factors influence the
3:15
price of an agricultural product such as
3:18
crop supply and demand the whether the
3:21
consumers choices the new uses of the
3:24
product situations in other nearby
3:27
countries and substitution of other
3:30
crops a farmer wants to know how the
3:33
price of his crop will change the farmer
3:37
wants to know the best time to sell and
3:39
whether he needs to sell or store a
3:42
farmer should be aware of all the
3:44
factors that affect the supply and
3:46
demand of his crop as these will
3:48
influence the price farmers must look
3:51
for information about the current status
3:53
of the market this can be done by
3:56
relying on market analysts and marketing
3:59
advisers who can tell the farmers about
4:01
the market situation and the market
4:03
trends this will help the farmers make
4:06
good decisions about how to sell and
4:08
store their crop as well as what to
4:10
produce next year
4:12
you
4:22
you