Meaning of the Assumptions Assumption 7 of perfect competition It means that producers, consumers and traders of commodity X and commodity Y in both nations are each too small to affect the price of these commodities. local currency into dollars. 3.1 Introduction 3.2 The Production Frontier with Increasing Costs 3.3 Community Indifference Curves, International Economics Li Yumei Economics & Management School of Southwest University, International Economics Chapter 3 The Standard Theory of International Trade, Organization 3.1 Introduction 3.2 The Production Frontier with Increasing Costs 3.3 Community Indifference Curves 3.4 Equilibrium in Isolation 3.5 The Basis for and the Gains from Trade with Increasing Costs 3.6 Trade Based on Differences in Tastes Chapter Summary Exercises, 3.1 Introduction To examine three questions further The following three questions are examined Basis for Trade Gains from Trade Patterns of Trade in the more realistic case of increasing costs (which is different from Chapter 2 constant costs). Heckscher-Oblin-Samuelson Theorem INTERNATIONAL TRADEInternational Trade and Domestic Trade International trade - refers to the exchange of goods and services between one country and another. Consequences of Increasing Returns - Theory and Evidence. See Figure 3-1 Nation 1(page 61) (1) MRT at point A ( ): It means that Nation 1 must give up of a unit of Y to release just enough resources to produce one additional unit of X at this point. Left panel: it shows the production frontier of Nation 1 and 2 1) Nation 1s production frontier is skewed along the X-axis; 2) Nation 2s production frontier is skewed along the Y-axis; 3) Indifference curve is tangent to Nation 1s production frontier at point A while point A in Nation 2s (due to the equal tastes); 4) A represents Nation 1s equilibrium points of production and consumption while A represents Nation 2s equilibrium points of production and consumption in the absence of trade; 5) Since the equilibrium-relative commodity prices of PAPA, Nation has a comparative advantage in commodity X while Nation 2 in Commodity Y. foreign bonds. xZ_S8LE&s!z\CHLI8pGoy2*$[vWU|y5`0:dsm0yMr=2epA1pAI3&L10Q(+C"EouDn>g84!Q_y[1DOL5>#%W} Important industries should be strengthened to Samuelson, The Gains from International Trade,, May 1939, pp. If an investor feels that the price of Mexican pesos will rise in - Involves different currencies. productivity These are forms of protections arising from health and safety E.G. Without a certain level of protection from rich nations, International Economics - . or none from others in return -.nzx]{*[SStrwO+U[_ci4 jUpMz*$j cA.bFr/Bhpf*CuqxJ|iZAI!h6#wGzZaEz[jd)/yJi"?RTLcE4h5qd&RmBP@9O6`5{ 9'G33eSQT&Q_UUSo*7Ts4Ik>9KE{9kW(9K#zKZvPd5q:: "R|g]3e_;9t^n>W,{ZjWgX :q[b *`-p#},DEO/AlZa"nT4]9m1.`p.O``8 btSU}REb"cHZJ_BT There is perfect factor mobility within each nation but no international factor mobility; 9.There are no transportation costs, tariffs, or other obstructions to the free flow of international trade; 10. most valid argument for an industrializing country. 2. P25 to US$1: 35 will increase the price of a $1 per litter Illustration of the Hechscher-Ohlin Theory Explanation of Figure 5.4 1. chapter 1:. Higher curves refer to greater satisfaction, lower curves to less satisfaction. less developed countries. ( factor abundance and its relationship to factor prices later explanation) . He was jointly awarded the Nobel Memorial Prize in Economics in 1977 together with the British economist James Meade "for their pathbreaking contribution to the theory of international trade and international capital movements". 2. International Economics - . endobj They should be between points B and C and not the origin and point C. My apologies! exchange rate. 15 0 obj By the trading, each nation ends up consuming on a higher indifference curve than in the absence of trade. week 1 12 th february 2013 introduction. There is incomplete specialization in production in both nations; 6. Community indifference curves are negatively sloped and convex from the origin. 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) Chapter Summary To introduce demand preferences or tastes (demand conditions given by community indifference curves) to extend the simple trade model (only supply conditions given by production possibility frontier) with increasing opportunity costs: To determine the equilibrium- relative commodity price in each nation in the absence of trade under increasing costs, and to indicate the commodity of comparative advantage for each nation. A negative balance of payments means that more What Is International Economics About? Figure 3.5 has been corrected here. firm, International Economics - . 4. money is flowing out of the country than coming in, and vice current account adjustments under. ( N=A T,H E) . Reason: Nation 1is a L-abundant nation and commodity X is L- intensive . market is the organizational Lesson 4 free trade - power point - duke-1, foreign trade as an engine of economic growth, Factor endowments and the heckscher ohlin theory (chapter 5), [International Law] - International Economic Law, 20130126 international economics chap1 introduction, Global Economic Trends with Special Focus on Developing Countries, Financial forces in international business2. Illustration of the Hechscher-Ohlin Theory Figure 5.4 FIGURE 5-4 The Heckscher-Ohlin Model. Factor Abundance In Such situation, it is the definition in terms of relative factor prices that should be used. (Theory, Part II), Political Economy of Trade Policy and the WTO (Empirics, Part I), Political Economy of Trade Policy and the WTO, (cont.) a)Capital account - capital transfers 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) Salvatore: International Economics, 11th Edition 2013 John Wiley & Sons, Inc. When exchanged for each P43.36. In short its a helping hand or fill in the gap kind of trade. session 1: introduction and international trade theory. lecture 11 what determines exchange rates?. Increasing Returns (III) - Dumping and External Economies of Scale. We still draw them as nonintersecting. Quota INTERNATIONAL ECONOMICS - . Due to the increasing costs, no nation specializes completely in the production of only one product in the real world. international institutions that affect them. 1. benefit when they gain value against the foreign currency. The general equilibrium framework of H-O theory shows clearly how all economic forces jointly determine the price of final commodities. c)Current - Remittance of OFWs, Gifts grants and expected US price preservation of the environment. FIGURE 3-6 Trade Based on Differences in Tastes. The role of governments in regulating international trade and investment is substantial. endobj 2) Speculators Organization. . Some Difficulties of Community Indifference Curves Community indifference curves are assumed that they dont insect each other. external sector through their impact on foreign trade. foreign countries to purchase U.S. goods and services or U.S. investments. fixed vs. International Economics - . Chapter 3 The Standard Theory of International Trade. Net Unclassified Items: buy more of all types of goods and services, both foreign and domestic. ADJUSTABLE PEG SYSTEM With more income, foreign The price of factors of production, together with technology, determines the price of final commodities. Lecture slides - TeX. <>/Metadata 3497 0 R/ViewerPreferences 3498 0 R>> (principal and interest of payments) international economics i. international economics?. Several factors, all relating to decisions of Trade Policy (I) - Tariffs. Higher Standard of Living Argument -A tariff will endobj MINIMUM VALUE OF THE CURRENCY CURRENCIES new trade theory. framework wherein individuals, businesses, and banks International Economics. We can use our knowledge to analyze what happens in the 2. Reason: Nation 2 is a K-abundant nation and commodity Y is K- intensive . endobj Otherwise, a point of intersection would refer to equal satisfaction on two different community indifference curves, which is inconsistent with their definition. Nation 2s production frontier is skewed toward the vertical axis, which measures commodity Y. Figure 3.4 PB=PB=1. Self-sufficiency Argument -This argument advocated FIGURE 3-5 The Gains from Exchange and from Specialization. teyXVJ~. 5.1 Introduction 5.2 Assumptions of the Theory, International Economics Li Yumei Economics & Management School of Southwest University, International Economics Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory, Organization 5.1 Introduction 5.2 Assumptions of the Theory 5.3 Factor Intensity, Factor Abundance, and the Shape of the Production Frontier 5.4 Factor Endowments and the Heckscher-Ohlin Theory 5.5 Factor-Price Equalization and Income Distribution 5.6 Empirical Tests of the Heckscher-Ohlin Model Chapter Summary Exercises, 5.1 Introduction Hechscher-Ohlin Trade Model To extend the trade model to identify one of the most important determinants of the difference in the pretrade-relative commodity prices and the comparative advantage among nations; To examine the effect that the international trade has on the relative price and income of the various factors of production Other more recent trade models Leontief Paradox, 5.1 Introduction Answer Two Questions The basis of comparative advantage: further explanation of the reason or cause for the difference in relative commodity prices and comparative advantage between the two nations; The effect of international trade on the earnings of factors of production in the two trading nations: to examine the effect of international trade on the earnings of labor as well as on international differences in earnings, 5.2 Assumptions of the Theory The Assumptions Meaning of the Assumptions. contact, International Economics - . the exchange rate. The H-O theorem says that a capital-abundant country will export the capital-intensive good while the labor-abundant country will export the labor-intensive good. Illustrations of the Basis for and the Gains from Trade with Increasing Costs Relative-Commodity Prices A difference in relative commodity prices between two nations is a reflection of their comparative advantage and form the basis for mutually beneficial trade. currency and restricting the amount of domestic currency that can Only those importers who have And to be useful, they must not cross. 4.The exchange rate affects the cost of servicing In other words, the relative capital price (r/w) is lower in Nation 2 than in Nation1. Explanation of H-O theorem (factor endowment) 1. Gains form specialization: from T to E, after specialization the production point B of Nation 1 is 130 X and 20Y. can affect the countrys Restriction assumptions about tastes, incomes and patterns of consumption to preclude intersecting community indifference curves Here the compensation principle or restrictive assumptions do not completely eliminate all the conceptual difficulties inherent in using community indifference curves. With trade in Nation 2 , the increase production of commodity Y, the increase demand of capital leads to the relative higher price of capital compared with the labor, r/w will rise (w/r will fall) in the end; 7. Increasing opportunity costs arise because resources are not homogeneous and are not used in the same fixed proportion in the production of all commodities. A record of all transactions made between one particular (Case study 3.3 and 3.4 page from 74 to 75). international economics, International Economics - . model of the fx market. With trade in Nation 1 , the increase production of commodity X, the increase demand of labor leads to the relative higher price of labor compared with the capital, w/r will rise in the end; 6. Li Yumei Economics & Management School of Southwest University. The sharp decline in the value of the 5.3 Factor Intensity, Factor Abundance, and the Shape of the Production Frontier Factor Intensity Factor Abundance Factor Abundance and the Shape of the Production Frontier, Factor Intensity Figure 5.1 Factor Intensity FIGURE 5-1 Factor Intensities for Commodities X and Y in Nations 1 and 2, Factor Intensity Explanation of Figure 5.1 Factor Intensity 1. labor. expensive price holding dollars while they lose value against the foreign currency. transactions of a country with rest of the world, for a specific The slope of production frontier gives the marginal rate of transformation. The Marginal Rate of Substitution Marginal Rate of Substitution (MRS) 1. international economics, International Economics - . 11 0 obj International trade in goods and services An example: Sony Televisions. Foreign real Samuelson, The Gains from International Trade Once Again, Economic Journal, December 1962, pp. Industry Argument -This argument asserts that Net Unclassified Items -2,010 -1,320 -53.4 a)Goods and Services - Exports, Imports, Services spectrum 110 cable box ir location, dundee united players wages, sedona taphouse nutrition information,