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Extended-form Case Study

International trade: stylised simulation

Published on August 31, 2026   15 min

A selection of talks on Finance, Accounting & Economics

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0:00
Hello. I'm Piotr Jaworski. I'm a Senior Lecturer in International Economics at the University of Dundee Business School. In this session, I would like to present a stylus model of international trade and conclusions resulting from it.
0:18
We are going to address the following questions. What is the role of the firm in the international trade? How do economists transform observations of reality into models? Why do we need economic models? We'll then apply the model we created by asking who benefits and who loses from international trade. Does the history confirm our model's prediction? Is there a difference between short-term and long-term effects? Does it matter for the society?
0:51
Let's start. We have a closed economy with no possibility of trading with other countries. Suddenly the government allows trade with Japan by signing a free trade agreement. Both Japanese and UK markets produce only two goods screens and computers. The prices in both markets are as follows. In Japan, you can buy or sell PC for $75 and a screen for $50. In the UK, a computer costs 100 and screens cost $150.
1:26
Now there is a task for your firm. Let's assume you are a British merchant with 300,000 in capital that you can spend only in the UK. You cannot transfer money abroad. You can buy and sell computers in both markets at local prices without restrictions and you can transport goods between the markets for free. However, you cannot transfer money across the borders. Let's add some important qualifications. First, screens and computers from both countries are identical. You cannot determine where they were produced simply by looking at them. Second, computers and screens are sold separately. They don't constitute asset. Finally, money cannot be transferred across the borders nor is any credit available to you in Japan. We have created a free trade area where such financial transfers are not possible.

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International trade: stylised simulation

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