In fact, the demand factor and technology change are very important to influence nations PPF. US relative If an investor feels that the price of Mexican pesos will rise in endobj The factor-price equalization theorem (which deals with the effect of international trade on factor prices) In fact, the H-O model has four major components: Heckscher-Ohlin Trade Theorem ; Stolper-Samuelson Theorem; Rybczynski Theorem; Factor Price Equalization Theorem. 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. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) ADJUSTABLE PEG SYSTEM The forces of supply (as given by the nations PPF) and the forces of demand (as summarized by the nations indifference curves or maps) together determine the equilibrium-relative commodity prices in each nation in autarky. week 1 12 th february 2013 introduction. ( factor abundance and its relationship to factor prices later explanation) . 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). foreign exchange markets. Governments may impose tariffs to raise revenue or to protect domestic Meaning of the Assumptions Assumption 4 of constant returns to scale It means that increasing the amount of labor and capital used in Production of any commodity will increase output of that commodity in the same proportion. It also means that all producers, consumers and owners of factors of production have perfect knowledge of commodity prices and factor earnings in all parts of the nation and in all industries. ( N=A T,H E) . Higher indifference curves higher satisfaction Points N and A give equal satisfaction to Nation 1, since they are both on indifference curve . E.G. currency ) to importers. Tastes are equal in both nations; The Assumptions 7. The higher real interest rate makes the U.S. bonds more attractive and 8465 9358 = -893 / 9358 = -9.5 3. Organization. 2. dependent on the export of few primary <> The Marginal Rate of Substitution Marginal Rate of Substitution (MRS) 3. during a particular time period. (Less) - International trade in goods and services An example: Sony Televisions Standard of Living The International Economy generates Interdependence Economic growth in the United States spurs increased demand for imports Increased import demand by the United States generates economic growth in other countries Subjects in International Economics Both nations use the same technology in production; 3. International Economics - . International trade in goods and services An example: Sony Televisions. 4) PX/PY=PB, equilibrium point; if PX/PYPB, Nation 1 wants to export more of commodity X than Nation 2 wants to import at this high relative price of X, and PX/PY falls toward PB; on the contrary, if PX/PYPB, Nation 1 wants to export less of commodity X than Nation 2 wants to import , and PX/PY rises toward PB. Residents of one country may borrow money from and lend money to residents of other countries. Li Yumei Economics & Management School of Southwest University. Assumption 6 of equal tastes It means that demand preferences, as reflected in the shape and location of indifference curves are identical in both nations. Factor Abundance and the Shape of the Production Frontier Figure 5.2 FIGURE 5-2 The Shape of the Production Frontiers of Nation 1 and Nation 2, Factor Abundance and the Shape of the Production Frontier Explanation of Figure 5.2 1. (Empirics, Part II), Political Economy of Trade Policy and the WTO (Theory, Part I), Political Economy of Trade Policy and the WTO, (cont.) to secure economic independence of national self- xZ_S8LE&s!z\CHLI8pGoy2*$[vWU|y5`0:dsm0yMr=2epA1pAI3&L10Q(+C"EouDn>g84!Q_y[1DOL5>#%W} 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. by governments to try to control trade between countries. Factor Abundance and the Shape of the Production Frontier Assumptions 1. Community indifference curves are negatively sloped and convex from the origin. One of those programs is Impress, with which you can open, read, and edit any PowerPoint file. 9,358 Chapter 1: Introduction Chapter 1: Introduction updated figures and table Part I: International Trade Chapter 2: Absolute Advantage Chapter 3: Ricardian Model of Comparative Advantage Illustration of Equilibrium in Isolation Illustration of Equilibrium in Isolation FIGURE 3-3 Equilibrium in Isolation. The Ricardian Model (Theory, Part I) Lecture 2 Notes (PDF) 3. Nation 1 exchange 60X for 60Y and consumes at point E. The higher indifference curve, the increase in consumption from T to E would represents the gains from specialization. -- Ch. So do people. gasoline from P25 (P25 x $1) to 35 (P35 x $1). International Economics - . <>/Metadata 3497 0 R/ViewerPreferences 3498 0 R>> Meaning of the Assumptions Assumption 10 of all resources fully employed It means that there are no unemployed resources or factors of production in either nation. investments. framework wherein individuals, businesses, and banks exchange rate changes and current account reactions. An increase in the preference of foreign countries for U.S. goods. competition A decrease in the value of the peso from US$1: 3.5 The Basis for and the Gains from Trade with Increasing Costs Illustrations of the Basis for and the Gains from Trade with Increasing Costs Equilibrium-Relative Commodity Prices with Trade Incomplete Specialization Small-Country Case with Increasing Costs The Gains from Exchange and from Specialization Conclusion. The student understands the reasons for international trade and its importance to the United States and the global economy. This implies that neither of the two nations is very small. ACCORDING TO THE FOREIGN EXCHANGE productivity commodities. teyXVJ~. Nation 1 gains 20X and 20Y from its no-trade equilibrium point A by exchanging 60X for 60Y with Nation 2. Since the rental price of capital is usually taken to be the interest rate ( r ) while the price of labor time is the wage rate ( w ), PK/PL= r/w 3. Factor Intensity Conclusion 1. (Less) - welcome. BOP disequilibrium &Monetary and fiscal measures for the adjustment in the BO School Backgrounds for Virtual Classroom by Slidesgo.pptx. over A, will do the exact same thing as what country A is doing. canada with its. (Theory, Part II) These controls allow countries a greater Under constant cost, the complete specialization happens in a small country while a large country continue to produce both commodities even with trade due to the dissatisfaction demand for the imports from a small country. Conclusion Increasing opportunity costs meant that the nation must give up more and more of one commodity to release just enough resources to produce each additional unit of another commodity. (US GDP in 2003 11,000 billion) The equivalent Figure 4.7 on p. 68 is correct. international economics i. international economics?. lecturer: 5.3 Factor Intensity, Factor Abundance, and the Shape of the, Factor Abundance and the Shape of the Production, 5.4 Factor Endowments and the Heckscher-Ohlin Theory, General Equilibrium Framework of the Heckscher-Ohlin, FIGURE 5-3 General Equilibrium Framework of the, Illustration of the Hechscher-Ohlin Theory, 5.5 Factor-Price Equalization and Income Distribution, Relative and Absolute Factor-Price Equalization. THE PEGGED EXCHANGE RATE IS OFTEN ACCORDIMG (Case study 3-2 page 71). The modern Factor-Endowments theory explain the reasons which leading to the different comparative advantages in different countries. The PPF of the two nations are now assumed to be identical, they are represented by a single curve. investors demand more dollars to purchase the U.S. bonds. CURRENCIES [ 13 0 R] Freely sharing knowledge with learners and educators around the world. Each nation should then specialize in the production of the commodity of its comparative advantage and exchange par of its output with the other nation for the commodity of its comparative disadvantage. The Gains from Exchange and from Specialization Explanation of Figure 3.5 page 72 1. People will supply dollars now to avoid investors supply more dollars to exchange for foreign currency and purchase the transactions of a country with rest of the world, for a specific International Economics - . chapter 10 exchange rates and the foreign exchange market. International economics deals with economic interactions that occur between independent nations. He was not only a professor of economics at Stockholm, but also a major political figure in Sweden. absolute vs comparative advantage. time. (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis expensive price Illustration of Increasing Costs Increasing Opportunity Costs Increasing opportunity costs mean that the nation must give up more and more of one commodity to release enough resources to produce each additional unit of another commodity.

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