1 / 13

Interregional Trade

Interregional Trade. Lecture 8 Last lecture: - Industrial Location Theory This lecture: - Interregional Trade Aim: To discover why regions specialise in certain commodities Outcomes: Awareness of Ricardian and Heckscher-Ohlin theories of regional trade

fynn
Download Presentation

Interregional Trade

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Interregional Trade Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  2. Lecture 8 Last lecture: - Industrial Location Theory This lecture: - Interregional Trade Aim: • To discover why regions specialise in certain commodities Outcomes: • Awareness of Ricardian and Heckscher-Ohlin theories of regional trade • Awareness of more radical explanations of regional trade and specialisation Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  3. Proposition - Regions need to trade if they are to be prosperous. • All regions are becoming more “open” EU, GATT. Proportion of goods and services % GDP exported imported Luxembourg 93% 80% Belgium 75% 69% Greece 16% 24% • Success breeds Success. Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  4. Ricardian Trade Theory - regions can gain from trade by specialising in production and export of goods in which they have a “comparative advantage” • Possibility of mutually advantageous gains from trade. • Exchange rate cars for wheat South 1:5 North 1:7 if world rate settles at 1:6 • South exchanges one car for 6 tonnes of wheat can only get 5 tonnes at home • North imports car for 6 tonnes of wheat but cost of home produced is 7 tonnes Regional and Local Economic Analysis (RALE) Lecture slides – Lecture 8

  5. Question - what is the source of comparative advantage? • Labour productivity (is this realistic?) • Technology or capital stock? • Could it be wages? Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  6. P of labour/ price of capital F cs F cn Wheat 1 unit Cars 1 unit R cn R cs R ws R wn Ratio of labour to capital L/K Heckscher- Ohlin Trade Theorem • Simple version only two factors of production K and L. • Comparative advantage from initial factor endowment each region specialising in its rich factor. • capital abundance in south leads to car production • Labour abundance in north leads to wheat production. Adapted from Armstrong and Taylor (2000) pp 125 Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  7. Adapted from Armstrong and Taylor (2000) pp 125 • Prediction • South has an advantage in producing cars because it uses a lot of its cheaper factor (capital) • North has advantage in Wheat because it uses a lot of its cheaper factor (Labour) • The difference in the price ratios creates the opportunity for trade Regional and Local Economic Analysis (RALE) Lecture slides – Lecture 8

  8. Restrictive assumptions • There are only two factors of production – labour and capital • Factors of production are of the same quality in both regions • Each region’s endowments of capital and labour are fixed • Production functions are the same in each region (no regional advantage from superior technology) • Production functions have constant returns to scale • There is perfect competition in each region’s factor and commodity markets • Trade is free of all obstructions (tariffs etc.) • There is strong factor intensity at all sets of factor prices • Tastes are identical in all regions and do not vary with regional income levels Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  9. Relaxing the assumption of fixed factor endowment • More than two factors of production • Factor quality (human capital) • Strong factor intensities • Constant returns to scale • Factor migration Adapted from Armstrong and Taylor (2000) pp 130 Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  10. Intra-industry trade theory (exchange of virtually identical products) Horizontal • Wide range of choice may loose share in domestic market but openings in export markets • Need high levels of output, economies of scale • Highest in closely integrated economies Vertical • In same industry but at different stages in the production chain Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  11. Competitive Advantage • Mutually reinforcing competitive advantage • Importance of interactions between elements • Not a formalised model but draws on case studies - not all regions will have all elements “in place”. Adapted from Armstrong and Taylor (2000) pp 133 Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  12. Centripetal forces Market-size Thick Labour market External economies Centrifugal forces Immobile factors Land rents External diseconomies See Krugman 1998 New Economic Geography • Home market effect • Footloose labour/industries model • Vertically linked industries model Regional and Local Economics (RALE) Lecture slides – Lecture 4b

  13. Conclusions - Why specialisation exists • Ricardian opportunity cost advantage creates climate for trade. • Heckschler-Ohlin theorem predicts local factor abundance as the reason for regional specialisation • Intra-industry trade models explain observed behaviour • Geography still matters. Next Week Inter-regional Labour Migration Regional and Local Economics (RALE) Lecture slides – Lecture 4b

More Related