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International Economics

International Economics. Extension to the Basic Trade Model: Some Empirical Issues. Faculty: Prof. D. Sunitha Raju. Factor Endowments: Heckscher – Ohlin theorem. Why differences in Relative Prices? Or what determines comparative advantage?.

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International Economics

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  1. International Economics Extension to the Basic Trade Model: Some Empirical Issues Faculty: Prof. D. Sunitha Raju

  2. Factor Endowments: Heckscher – Ohlin theorem Why differences in Relative Prices? Or what determines comparative advantage? • Factor intensity / abundance, technology and factor prices • Trade influences factor earnings

  3. Heckscher-Ohlin Theorem • A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant factor and import the commodity whose production requires intensive use of nation’s relatively scarce factor (costly). • Factor endowments are basic determinants of comparative advantage • Factor abundance and their prices are a cause for difference in relative commodity prices

  4. Factor Intensity • Assume: • Two commodities x & Y • Two factors L & K • Capital Intensive Production • If capital – labour ratio (K/L) is greater in the production Y than in the production of X. Then Y is capital intensive. • Labour Intensive Production • If K/L is lower in the production of X than in the production of Y then X is labour intensive

  5. Factor Intensities for Commodities X and Y in Nations 1 & 2 Nation 2 K Nation 1 K 10 in Y = 4 . in Y = 1 8 2Y 6 . 6 . 4 2Y 1Y 4 . 2X 2 1Y 2X 2 1X 1 1X 0 L 0 1 2 4 6 2 4 6 8 10 12 L

  6. Factor Price Equalisation • International trade will bring about equalization in the relative and absolute returns to the homogenous factors across nations. • Trade is a substitute for mobility of factors • Trade tends to reduce pre-trade differences in w and r between two countries

  7. Factor Endowments of Various Countries and Regions, as a Percentage of the World Total in 1993 Contd./-

  8. Capital Stock per Worker of Selected Countries in 1993 (in 1990 International dollar prices)a

  9. Export/Import Ratios in Leading Industrial Countries

  10. Export/Import Ratios in Manufacturing in Selected Asian Countries in 1993 aPart of China b Province of China Source: United Nations Conference on Trade and Development, Trade and Development Report (New York: UN, 1995), p.150.

  11. Intra-Industry Trade • Export and import correspond to the same industry • Expansion of IIT - Differentiated products - Transportation costs - Production processes divided across countries

  12. Shares of Intra-Industry Trade in Manufactured Products, Selected

  13. Intra-Industry Trade (IIT) • Export and import of goods from the same industry • Measure of IIT IIT = 1 - • IIT ranges from 0 to 1 Exports - Imports Exports + Imports

  14. Intra-Industry Trade Indexes, 1985

  15. Intra-Industry Trade • In homogenous products • Transportation costs • Seasonality • In differentiated products • Vertical specialization in breaking up of production chain

  16. Ratio of Merchandise Trade to Merchandise Value-Added, 1980, 1990, 2000 (per cent)

  17. Trade with Economies of Scale • Internal Economies of Scale • External Economies of Scale • Dynamic External Economies

  18. Trade based on Economies of Scale Y 120 B’ 100 80 . 60 E . A II 40 I 20 PA B X 0 20 40 60 80 100 120 • International Economies of Scale • External Economies of Scale

  19. Transport Costs and Trade • High Transport Costs can impede trade • Limits vertical specialization • Can alter the pattern of trade through price effects • Who bears the burden • Importer or exporter

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