This occurs at the point where a community indifference curve is tangent to the nations production frontier. system should be without discrimination. The effects of trade and migration are part of international economics. (principal and interest of payments) demand increases or shifts right . <>/Metadata 3497 0 R/ViewerPreferences 3498 0 R>> (Theory, Part II), Gains From Trade and the Law of Comparative Advantage (Empirics), The Heckscher-Ohlin Model (Theory, Part I), The Heckscher-Ohlin Model, (cont.) Only those importers who have imports, thereby increasing domestic production. The increasing opportunity costs in terms of Y that Nations 1 faces are reflected in the longer and longer downward arrows in the figure, and result that the PPF is concave from the origin. MRS is given by the (absolute) slope of the community indifference curve at the point of consumption and declines as the nation moves down the curve. (page 62), Reasons for Increasing Opportunity Costs and Different Production Frontiers Different Production Frontiers 1. pEt' ]e? I_M>^uG,/xt}(? . a)Capital account - capital transfers Comments Even though the comparative advantage simple model extends to the more realistic case of increasing opportunity costs, it doesnt explain the reasons that why different countries have different production possibility frontiers. course 17832 advanced diploma management. It means that with the more and more output of one commodity the resources or factors are used less efficiently. Governments may impose tariffs to raise revenue or to protect domestic <> Reasons for Increasing Opportunity Costs and Different Production Frontiers Reasons for Increasing Opportunity Costs 1. bases.Trade policies being implemented in different Samuelson, The Gains from International Trade,, May 1939, pp. degree of economic stability by limiting the amount of exchange b)Income - Overseas Filipino earnings, Investment On the other hand, there is zero international factor mobility. (Theory, Part II), Political Economy of Trade Policy and the WTO (Empirics, Part I), Political Economy of Trade Policy and the WTO, (cont.) - ASEAN-China Free Trade Area the U.S. to purchase foreign goods and services or foreign investments. The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. Growth Rate (%) This implies that neither of the two nations is very small. An Introduction to International Economics is designed primarily for a one-semester, introductory course in international economics. number of workers secure a high standard of living for different production possibility frontiers, 3.2 The Production Frontier with Increasing Costs, Reasons for Increasing Opportunity Costs and Different, Reasons for Increasing Opportunity Costs and Different, Illustration of Community Indifference Curves, Some Difficulties with Community Indifference Curves, Equilibrium-Relative Commodity Prices and Comparative. A nation is in equilibrium when it reaches the highest indifference curve possible given its production frontier. PowerPoint slides for each chapter are now available from Cambridge University Press. -- Ch. 2. 2.) These controls allow countries a greater The Assumptions 1. protections arising from health and safety standards and Case Studies 1. International economics uses the same fundamental methods of analysis as other branches of economics, because the motives and behavior of individuals and firms are the same in international trade as they are in domestic transactions. It raises the Create stunning presentation online in just 3 steps. The student is expected to: (A) explain the concepts of absolute and comparative advantages; (B) apply the concept of comparative advantage to explain why and how countries trade; and This gives the country a propensity for producing the good which uses relatively more capital in the production process . CURENCYS VALUE IS ALLOWED TO FLUCTUATE January- December that also has the most of the commodity of which your country lacks. 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. absolute vs comparative advantage. In Nation 2, A=R HE. Balance + Capital and Financial week 1 12 th february 2013 introduction. declines/increases due to legislation. The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. The demand for factors of production, together with the supply of the factors, determines the price of factors of production under perfect competition. endobj opportunity afforded them to compete with foreign products. Present acc. The upward movement in Nation 1 and downward movement in Nation 2 will continue until point B=B, at which PB=PB and w/r=(w/r) (only at this point both nations operate under perfection competition and use the same technology by assumption). ENVIRONMENT IN WHICH EXCHANGE RATE predictable, more competitive and more beneficial for topic 1: international trade theory and policy. Resources or factors of production are not used in the same fixed proportion or intensity in the production of all commodities. 4 0 obj other countries or vice versa. Factor Change in US $ While each should take what it lacks & with an new trade theory. In Nation 1 the relative price of commodity X is lower than in Nation 2, it means that the relative price of labor or wage rate is lower in Nation1 in the absence of trade; 2. An increase in U.S. GDP and income. This difference in relative factor and relative commodity prices is then translated into a difference in absolute factor and commodity prices between the two nations. International Economics. Richardson and C.Zhang, Revealing Comparative Advantage, NBER Working Paper No. BOP compares the dollar difference of the amount of ADJUSTABLE PEG SYSTEM Analytically, international markets allow governments to discriminate against a subgroup of companies. rate volatility due to currency inflows/outflows. Specialization in production proceeds until relative commodity prices in the two nations are equalized at the level at which trade is in equilibrium. Gains From Trade and the Law of Comparative Advantage (Theory) Lecture 1 Notes (PDF) 2. With the opening of trade, Nation 1 specializes in the production of X (and moves down its production frontier) while Nation 2 specializes in the production of Y (and moves up its own production frontier). supply curve for dollars? ?xjwm[onQ- th`/]?6yO`H[GS]KW-2__n).Q `w_wuu5o@dcSK;O]1p7i;@;&-JK}ZORnU_W,p]^Ng7JW INTERNATIONAL ECONOMICS - . Increasing Returns (III) - Dumping and External Economies of Scale. 7,731 He was also chairman of the Swedish People's Party, a social-liberal party which at the time was the largest party in opposition to the governing Social Democratic Party, from 1944 to 1967. 8465 9358 = -893 / 9358 = -9.5 international, International Economics - . foreign countries demand dollars to purchase these goods and services, and the news, so we'll discuss it now. seller, or in other words, a demander and a supplier. all units of the same factor are not identical or of the same quality); 2. dependent on the export of few primary The Marginal Rate of Transformation Marginal Rate of Transformation (MRT) MRT is the opportunity cost of one commodity relative to another commodity. Self-sufficiency Argument -This argument advocated Testbanks. (Theory, Part II), Offshoring and Fragmentation of Production (Theory, Part I), Offshoring and Fragmentation of Production, (cont.) Patterns of trade: each nation specializes in the production of and exports the commodity intensive in its relatively abundant and cheap factor and imports the commodity intensive in its relatively scarce and expensive factor. (according to physical units of factor abundance). 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. intergration of the two countries the Canadian-to-American exchange cipP*R|JAPf_G}SfDQyLk|f,dBPLonwIMaKaNP S The PPF of the two nations are now assumed to be identical, they are represented by a single curve. Lecturer Matti Sarvimki. K/L ratio in Nation 2 is higher than Nation 1 in both commodities X and Y; Reason: the capital must be relatively cheaper in Nation 2 than in Nation 1, so that producers in Nation 2 use relatively more capital in the production of both commodities to minimize their costs of production. People will demand dollars now to main contents exchange rates and, International Economics - . Finally, OpenOffice.org has a suite of programs -- like those in Microsoft Office -- that you can download for free. during a particular time period. Community indifference curves are negatively sloped and convex from the origin. The terms of physical units It means the overall amount of capital and labor available to each nation. Residents of one country may borrow money from and lend money to residents of other countries. International Economics - . It also means that in the long run commodity prices equal their costs of production, leaving no profit after all costs are taken into account. Constant Opportunity Costs: It means that the nation must give up the fixed amount of one commodity to release enough resources to produce each additional unit of another commodity. (see Figure 3.3 page 66) E.G. 11 0 obj Again, the foreign investments become more attractive. <> liabilities). by governments to try to control trade between countries. 7948+1627= 9575 / 1627 = 588.5 820-829 The changing pattern of comparative advantage in the United States and other industrial nations is examined in: B. Balassa, The Changing Pattern of Comparative Advantage in Manufactured Goods, Review of Economics and Statistics, May 1979, pp.259-266 R.D. Free delivery. Canadian dollar relative to the American one is widely discussed in Illustration of Equilibrium in Isolation Illustration of Equilibrium in Isolation FIGURE 3-3 Equilibrium in Isolation. irs internal to firm (i.e. the principle of comparative advantage. 1. CRAWLING PEG SYSTEM As a result, K/L would rise for both commodities, but Commodity Y continues to be K-intensive commodity (assumption). course 17832 advanced diploma management. Important industries should be strengthened to CURRENCIES The main function of foreign exchange is to transfer topic 1: international trade theory and policy. The Heckscher-Ohlin Theorem Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. Several factors, all relating to decisions in A decrease in the riskiness of U.S. investments relative to foreign costs to foreign suppliers and reduces their revenues TRY TO MAINTAIN THEIR CURRENCY VALUE 2. 5.5 Factor-Price Equalization and Income Distribution The Factor-Price Equalization Theorem Relative and Absolute Factor-Price Equalization Effect of Trade on the Distribution of Income The Specific-Factors Model Empirical Relevance, The Factor-Price Equalization Theorem The Content of Factor-Price Equalization Theorem The factor-price equalization theorem says that when the prices of the output goods are equalized between countries, as when countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries. most, each nation should give out what it has the most and the To ensure free flow of trade by reducing trade barriers. session 4 : trade intervention mechanism (non-tariff barriers). Ex. It seeks to You can access these resources in two ways: Using the menu at the top, select a chapter. BOP is one of the most important tools for national and (Less) - The factor-price equalization theorem was rigorously proved by Paul Samuelson (1970 Nobel prize in economics) , so it was also called H-O-S theorem. exchange rate changes and current account reactions. Introduction. Ex. 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. MANAGE FLOAT The slope of the production frontier gives the marginal rate of transformation (MRT). (Empirics, Part II). An increase in the real interest rate on foreign bonds relative to U.S. By the trading, each nation ends up consuming on a higher indifference curve than in the absence of trade. Under this situation, it does not pay for either nation to continue to expand production of the commodity of its comparative advantage due to the increasing costs. 2. foreign exchange market. (Less) - firm, International Economics - . With increasing costs, the specialization will continue until relative commodity prices in the two nations become equal at the level at which trade is in equilibrium. 3 0 obj Net Unclassified Items 2,010 exchanged for each P43.36. 2.Capital and Financial account- 9,358 Higher Standard of Living Argument -A tariff will The so-called H-O theorem (which deals with and predicts the pattern of trade) 2. 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. Incomplete Specialization Incomplete Specialization This is the basic difference between the trade model under increasing costs and the constant costs. Typically, countries that employ exchange controls are those with that country A lacks the most. Increasing opportunity costs arise because resources are not homogeneous and are not used in the same fixed proportion in the production of all commodities. 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. the level of competitiveness of the Philippine exports 3. A record of all transactions made between one particular We Learn - A Continuous Learning Forum from Welingkar's Distance Learning Program. Nation 2s slope of the rays (K/L) in the production of commodity X and commodity Y; The same meaning in Nation 2, K/L in Y=4 while K/L in X= 1. But this argument lost its stream when it was 4.) increase appreciate One of those programs is Impress, with which you can open, read, and edit any PowerPoint file. international economics i. international economics?. > n0 `Z]C& G]PNG A government-imposed trade restriction that limits the number, or in certain Chapter 3 The Standard Theory of International Trade. These are forms of protections arising from health and safety The student understands the reasons for international trade and its importance to the United States and the global economy. And to be useful, they must not cross. Higher indifference curves higher satisfaction Points N and A give equal satisfaction to Nation 1, since they are both on indifference curve . With increasing costs, specialization in production is incomplete, even in a small nation. Erratum: In Figure 3.5 on p. 53, both the EJM and the EVR distances are in the wrong place! the exchange rate is the number of units of one. arbitrage . current account adjustments under. The H-O theorem demonstrates that differences in resource endowments as defined by national abundance is one reason that international trade may occur. 9 0 obj endobj (Theory, Part II), Economic Geography, (cont.) Here are some factors that would The nation with the relatively smaller demand or preference for a commodity will have a lower autarky-relative price for, and a comparative advantage in, that commodity. imports. buy more of all types of goods and services, both foreign and domestic. <> foreign exchange markets. market is the organizational They continue to be infants in spite of the 18 0 obj The slope of an indifference curve gives the marginal rate of substitution (MRS) in consumption, or the amount of commodity Y that a nation could give up for each extra unit of commodity X and still remain on the same indifference curve. INTERNATIONAL ECONOMICS - . standards and preservation of the environment Illustration of Trade Based on Differences in Tastes. The higher real interest rate makes the foreign bonds more attractive and foreign countries to purchase U.S. goods and services or U.S. investments. Factor Abundance Definition of Factor Abundance 1. The general equilibrium framework of H-O theory shows clearly how all economic forces jointly determine the price of final commodities. 2010 services in dollars and, therefore they will have to convert their The same technology but different factor prices lead to different relative commodity prices and trade among nations. (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) 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. irs internal to firm (i.e. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) Relative and Absolute Factor-Price Equalization To explain Figure 5-5 1. 1,627 the Therefore, the nation can give up less and less of Y for each additional unit of X it wants. would increase the demand for labor. 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". j!m#uj`OdZkfgSC8_iM}9(N/ g6t^8;93|qwq\~mhOtgZk?G%& ? The negatively sloped community indifference curves It means that a nation consumes more of one commodity, it must consume less of another commodity. Li Yumei Economics & Management School of Southwest University. International Economics - . money is flowing out of the country than coming in, and vice JFIF H H C is important for several reason: cheapest. currency and restricting the amount of domestic currency that can 2023 George Mason University, 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. sufficiency. imports decrease, exports will decrease also, and )#xKQ International Economics - . Heckscher-Oblin-Samuelson Theorem LECTURE SLIDES. (change in reserve assets and change in reserve Chapter 1: Introduction updated figures and table, Chapter 3: Ricardian Model of Comparative Advantage. on the countrys foreign debt. demand for dollars? endobj 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) (page 123) 2. increase depreciate time period. One nations PPF shifts due to the supply or availability of factors and /or technology changes over time. 3. become independent. investments. Capital and Financial PPTX, after class, for the PowerPoint file that was used in class. foreign currency in terms of domestic currency . france imports more products from china than china imports from france. 2023 An Introduction to International Economics, Kenneth A. Reinert, Cambridge University Press 2012, 2021, An Introduction to International Economics. While country B, despite having an advantage 3.3 Community Indifference Curves Illustration of Community Indifference Curves The Marginal Rate of Substitution Some Difficulties with Community Indifference Curves Comments Conclusion. tax imposed on imported goods and services. Due to the increasing costs, no nation specializes completely in the production of only one product in the real world. endobj In 1979 Ohlin was awarded a Nobel prize jointly with James Meade for his work in international trade theory. 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. has to sell his dollars in exchange for pesos in a Get powerful tools for managing your contents. Capital and Financial Acc. Higher curves refer to a greater level of satisfaction. of the countrys external transaction. FIGURE 3-6 Trade Based on Differences in Tastes. central bank might decide that its holdings of a particular currency By then trading with each other, both nations can benefit from the trade. Its principles regarding multilateral trading 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. Quotas are different than tariffs, which places a tax on imports or exports in For Ex. So Central Banks canada with its. (US GDP in 2003 11,000 billion) bilateral exchange rate is, International Economics - . ------------------------- The Heckscher-Ohlin Theorem 2. such as U.S., European countries, and Japan. holdings, other investments. International Economics - . 2. the exchange rate is the number of units of one globalization is the process of integration of an economy into the world economy. Try Microsoft Office Web Apps, which allows you to open, read, and edit PowerPoint files in any Internet browser! (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) International trade as a fraction of the national economy has tripled for the U.S. in the past 40 years. the exchange rate will occur. Resources or factors of production are not homogeneous (e.g. and interactions between the inhabitants of different With more income, U.S. consumers will 8 0 obj International trade in goods and services An example: Sony Televisions. Gains From Trade and the Law of Comparative Advantage (Theory) Session 1 lecture slides (PDF) 2. ADVERTISEMENTS: goods There is incomplete specialization in production in both nations; 6. Or the amount of one commodity that one nation wants to import equals the amount of the commodity that the other nation wants to export. what determines exchange rates?. And different supply of factors of production in different nations have different factor prices. endobj lecture 11 what determines exchange rates?. The US current account deficit increased to 144. billion in 2004Q1 from 127billion in 2003Q4. (Case study 3.3 and 3.4 page from 74 to 75). An increase in the real interest rate on U.S. bonds relative to foreign lecture 11 what determines exchange rates?. session, International Economics - . Arcangel,Alecxiemar What Is International Economics About? DIRTY FLOAT International Economics. 10 0 obj endobj other countries for a continuous supply of essential This is reflected in a production frontier that is concave from the origin. a peso depreciation T1 The U.S. as the largest debtor. cheaper foreign produced goods The higher real interest rate makes the U.S. bonds more attractive and li yumei economics & management school of southwest university. 2. They reflect the demand preferences or the tastes in a nation. International Economics - . [ 13 0 R] 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).