1 / 14

International Economics By Robert J. Carbaugh 7th Edition

International Economics By Robert J. Carbaugh 7th Edition. Chapter 4: Trade model extensions and applications. Why relative price differentials?. Factor endowment theory (Heckscher-Ohlin).

jaimie
Download Presentation

International Economics By Robert J. Carbaugh 7th Edition

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. International EconomicsBy Robert J. Carbaugh7th Edition Chapter 4: Trade model extensions and applications

  2. Why relative price differentials? Factor endowment theory (Heckscher-Ohlin) • Comparative advantage is explained entirely by different national supply conditions, especially resource endowments • Nations export products that use inputs which are relatively abundant (cheap) at home, and import products which need inputs which are relatively scarce (expensive) at home Carbaugh, Chap. 4

  3. Why relative price differentials? Factor endowment theory: assumptions • Nations all have the same tastes and preferences (same indifference curves) • They use factor inputs which are of uniform quality • They all use the same technology Carbaugh, Chap. 4

  4. Factor endowment model Comparative advantage according to factor endowment theory Autarky equilibrium France’s transformation schedule F 21 Germany’s transformation schedule Wheat (land-intensive) G 15 II I tG tF 14 20 Autos (capital-intensive) Carbaugh, Chap. 4

  5. Factor endowment model Comparative advantage according to factor endowment theory Post-trade equilibrium France’s transformation schedule 30 F’ Germany’s transformation schedule F H Wheat (land-intensive) 20 G 10 G’ II tt 6 18 30 Autos (capital-intensive) Carbaugh, Chap. 4

  6. Factor endowment model Factor endowment theory: implications • Factor price equalization • Shift within each nation towards use of cheaper factors, and away from expensive ones, leads to more equal factor prices • Distribution of income • Trade changes domestic distribution of income as demand for different factors changes Carbaugh, Chap. 4

  7. Bringing theory closer to reality Specific factor theory • Looks at the income distribution effects of trade in the short run, when some factor inputs are not mobile among sectors • Indicates that workers may be better or worse off, depending on preferences • Predicts that owners of factors used in export industries gain from trade, while owners of factors used in import-competing industries will lose from trade Carbaugh, Chap. 4

  8. DL’(C) C B 18 12 Bringing theory closer to reality Relative prices and the specific factor model US computer and steel industries Wage/$ Wage/$ DL(C) DL(S) 30 20 20 15 15 A Labor used in computers Labor used in steel 14 Total labor force (30 workers) 16 Carbaugh, Chap. 4

  9. Bringing theory closer to reality Economies of scale & specialization • Economies of scale provide incentives for specialization, as per unit costs go down as production increases • Trade provides a larger potential market for products, making higher production levels possible Carbaugh, Chap. 4

  10. Economies of scale Economies of scale as basis for trade A Minimum efficient scale 10,000 B C 8,000 ACMexico,US 7,500 Price (dollars) 275 200 100 Autos (thousands) Carbaugh, Chap. 4

  11. Economies of scale Trade & specialization under decreasing costs D 125 United States B Computers A South Korea C 100 Tons of Steel Carbaugh, Chap. 4

  12. Bringing theory closer to reality Other extensions of the theory • Overlapping demands • Intra-industry trade • Product cycles • Dynamic comparative advantage - industrial policy Carbaugh, Chap. 4

  13. Transportation costs Free trade under increasing costs No transportation costs United States Auto price ($ thous.) Canada S D F 8 a c d b 6 E 4 D S 2 4 6 6 2 4 Autos Autos exports imports Carbaugh, Chap. 4

  14. Transportation costs Free trade under increasing costs Transportation costs of $2000 per auto United States Auto price ($ thous.) Canada S D F 8 7 h g e f 5 4 E D S 3 4 5 5 3 4 Autos Autos exports imports Carbaugh, Chap. 4

More Related