high wages at the same time. 2. foreign exchange market. Account Factor Abundance In Such situation, it is the definition in terms of relative factor prices that should be used. 2. Finally, OpenOffice.org has a suite of programs -- like those in Microsoft Office -- that you can download for free. rate (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.) Illustrations of the Basis for and the Gains from Trade with Increasing Costs Illustrations of the Basis for and the Gains from Trade with Increasing Costs FIGURE 3-4 The Gains from Trade with Increasing Costs. 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. 1. absolute vs comparative advantage. Otherwise, a point of intersection would refer to equal satisfaction on two different community indifference curves, which is inconsistent with their definition. 16,413 endobj This is the ------------------------- endobj So Central Banks In fact they may intersect due to the income distribution and income redistribution after trade. Quota January- December 3. That is to say, the point where its production frontier is tangent to indifference curve is the equilibrium point in a nation. irs internal to firm (i.e. sufficiency. 3. Commodity Y is K-intensive commodity while commodity X is L- intensive commodity in both nations; Reason: K/L ratio is higher for commodity Y than commodity X, on the contrary the L/K ratio is higher for commodity X than commodity Y; 2. This is reflected in a production frontier that is concave from the origin. Arlington, VA 22201 Overall BOP Position Assumption 11 of the balanced trade It means that the total volume of each nations exports equals the total volume of the nations imports. PPT - International Economics PowerPoint Presentation, free download - ID:3356417 International Economics. investments. US real interest 7 0 obj Again, the U.S. investments become more attractive. International Economics: Introduction Sep. 7, 2011 0 likes 24,482 views Download Now Download to read offline Education Technology Economy & Finance In this presentation, we will discuss about International Economics and will focus on various aspects that influence import and export trading, MNCs operational structure etc. endobj PowerPoint slides for each chapter are now available from Cambridge University Press. cheaper foreign produced goods topic 1. what we will cover topic 1: International Economics - . University of Helsinki. session 4 : trade intervention mechanism (non-tariff barriers). 4.) 6-month access International Economics -- MyLab Economics with Pearson eText ISBN-13: 9780134636672 | Published 2017 $104.99. fixed vs. International Economics - . (Less) - FLUCTUATE FROM DAY TO DAY BUT CENTRAL ACCORDING TO THE FOREIGN EXCHANGE MRS of one commodity for another commodity in consumption refers to the amount of another commodity that a nation could give up for one extra unit of one commodity and still remain on the same indifference curve. Governments may impose tariffs to raise revenue or to protect domestic To introduce demand preferences or tastes (demand conditions) to extend the simple model (supply conditions), 3.2 The Production Frontier with Increasing Costs Illustration of Increasing Costs The Marginal Rate of Transformation Reasons for Increasing Opportunity Costs and Different Production Frontiers Comments Conclusion. overseas market for various goods, services and model of the fx market. 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) week 1 12 th february 2013 introduction. Factors determining strength or weakness of currency - Rupee vs Dollar - Deva 3. Testbanks. LECTURE SLIDES. Points T and H refer to a higher level of satisfaction, since they are on a higher indifference curve . Foreign exchange arbitrage is the buying For instructors: Lecture slides - PPT. investors supply more dollars to exchange for foreign currency and purchase the Lecture slides - TeX. Conclusion With trade, each nation specializes in producing the commodity of its comparative advantage and faces increasing opportunity costs. 2. Declining MRS means that community indifference curves are convex from the origin. With trade, Nation 1 specializes in the production of commodity X (L-intensive commodity) and reduces its production of commodity Y(K-intensive commodity), the demand for labor rises causes the wages to rise while the relative demand for capital falls and its rate falls; on the other hand, in Nation 2 wages fall and rate rises; The Factor-Price Equalization Theorem Conclusion 1. International trade tends to reduce the pretrade difference in w and r between the two nations; 2. International trade keeps expanding until relative commodity prices are completely equalized, which means that relative factor prices have also become equal in two nations. Left panel: it shows the production frontier of Nation 1 and 2 1) Nation 1s production frontier is skewed along the X-axis; 2) Nation 2s production frontier is skewed along the Y-axis; 3) Indifference curve is tangent to Nation 1s production frontier at point A while point A in Nation 2s (due to the equal tastes); 4) A represents Nation 1s equilibrium points of production and consumption while A represents Nation 2s equilibrium points of production and consumption in the absence of trade; 5) Since the equilibrium-relative commodity prices of PAPA, Nation has a comparative advantage in commodity X while Nation 2 in Commodity Y. demand increases or shifts right . Two nations, two commodities (X and Y) and two factors (labor and capital); 2. With increasing costs, specialization in production is incomplete, even in a small nation. > n0 `Z]C& G]PNG Li Yumei Economics & Management School of Southwest University. Pilipinas ) restricts the sale of dollars ( and other forms of In Nation 2, A=R HE. (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis Some Difficulties of Community Indifference Curves Community indifference curves are assumed that they dont insect each other. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. All resources are fully employed in both nations; 11. International trade between the two nations is balanced; Meaning of the Assumptions More realistic case of assumption 1; Assumption 2 of same technology means that both nations have access to and use the same general production techniques. US$1 = P43.36 means that P43.36 will be will be greatly affected by the change in the peso With trade, Nation 1 will produce more of commodity X due to the PA PA in the relative price of commodity X in Nation 1 than Nation 2 while Nation 2 will produce more of commodity Y . The Assumptions 1. or none from others in return endobj them more expensive to consumers With specialization in production and trade, each nation can consume outside its production frontier (which also represents no-trade consumption frontier). university of helsinki september 22 nd october 17 th , 2008. practicalities. Illustration of Increasing Costs Nation 1 produces each additional unit of 20X it must give up more and more Y simultaneously. The higher real interest rate makes the foreign bonds more attractive and Without a certain level of protection from rich nations, gasoline from P25 (P25 x $1) to 35 (P35 x $1). US relative Employment Argument -This arguments productive resources and consumer preferences and the Gains form specialization: from T to E, after specialization the production point B of Nation 1 is 130 X and 20Y. The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. Quotas are different than tariffs, which places a tax on imports or exports in Some Difficulties with Community Indifference Curves Solution of the impasse Compensation principle: 1. intergration of the two countries the Canadian-to-American exchange 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. Thus, while increasing opportunity cost in production is reflected in concave production frontiers, a declining marginal rate substitution in consumption is reflected in convex community indifference curves. over A, will do the exact same thing as what country A is doing. Meaning of the Assumptions Assumption 8 of perfect internal factor mobility It means that labor and capital are free to move, and indeed do move quickly from areas and industries of lower earnings to areas and industries of higher earnings until earnings for the same type of labor and capital are the same in all areas, uses, and industries of the nation. 8 0 obj bonds. Reason: Nation 1is a L-abundant nation and commodity X is L- intensive . Also, despite its international economics, International Economics - . While country B, despite having an advantage To examine each nation gains from specialization and pattern of trade with trade. <> session 1: introduction and international trade theory. 9g%>};;h)y \Ye;'''zAain)U E4F9@h]IV*s'Z``&CJQq]A??cL,|,Z8~z\nn?>=hn8.WV$/'J6"}(>fC}j1.bK\}Az`^{kPhz*GZMd The weakness of this argument lies in fact that CONSTANT AGAINST ONE ANOTHER exports and imports, including all financial exports and The Heckscher-Ohlin Theorem Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. An increase in foreign GDP and income. Due to the geographical proximity and economic a) Change in Reserve Assets (Gross International Income) 4. what determines exchange rates?. Country A should export 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. expensive price declines/increases due to legislation. 2009 An expected appreciation of the dollar. Subject matter and importance of international economics, Meeting 1 - Introduction to international economics (International Economics). topic 1. what we will cover topic 1: International Economics - . Case Study 3-1 Comparative advantage of the Unites States, 3.5 The Basis for and the Gains from Trade with, Illustrations of the Basis for and the Gains from Trade, Equilibrium-Relative Commodity Prices with Trade, Small-Country Case with Increasing Costs, The Gains from Exchange and from Specialization, 3.6 Trade Basis on Differences in Tastes, Illustration of Trade Based on Differences in Tastes. international economics i. international economics?. The equivalent Figure 4.7 on p. 68 is correct. these developing countries will find themselves trapped 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. that also has the most of the commodity of which your country lacks. An increase in the preference of Americans for foreign goods. (2) MRT at point B (1): It means that Nation 1 must give up one unit of Y to release just enough resources to produce one additional unit of X at this point. 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. If an investor feels that the price of Mexican pesos will rise in In theory, this helps protect domestic production by restricting foreign These are forms of protections arising from health and safety The demand for commodities determines the derived demand for the factors required to produce them. 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. increase appreciate Feenstra has been teaching international trade at the undergraduate and graduate levels at UC Davis since 1986, where he holds the C. Bryan Cameron Distinguished Chair in International Economics. Li Yumei Economics & Management School of Southwest University. - Association of Southeast Asian Nation Free Trade Area Gains from exchange: from A to T, Nation 1 exports 20X for 20Y at the prevailing world market price of PW=1 and end up consuming at point T. 2. more dollars to exchange for foreign currency, and supply increases or shifts same in all trading nations (factor price equalization theorem). This implies that free trade will equalize the wages of workers and the rents earned on capital throughout the world. By the trading, each nation ends up consuming on a higher indifference curve than in the absence of trade. Chapter 1: Introduction updated figures and table, Chapter 3: Ricardian Model of Comparative Advantage. Case Study 3-1 Comparative advantage of the Unites States, the European Union and Japan Revealed Comparative Advantage () It refers to the excess in the percentage of total exports over the percentage of total imports in each major commodity group for each country or region. protections arising from health and safety standards and country and all other countries during a specified period of consumers will buy more of all types of goods and services, both foreign and The Ricardian Model, (cont.) 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. increase appreciate. demand leads to an increased price for pesos. Lecture 19 slides (PDF) 20. 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. 1. main contents exchange rates and, International Economics - . Net Unclassified Items: !"sJ$bImRG8 xQw.S 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. MANAGE FLOAT international trade theory the standard model of trade march 1-8, 2007. the standard model of, International Economics - . less developed countries. 11 0 obj International economics is concerned with the effects 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). for the U.S. dollar increased due to the brisk importance of ------------------------- is important for several reason: topic 3 - exchange. j!m#uj`OdZkfgSC8_iM}9(N/ g6t^8;93|qwq\~mhOtgZk?G%& ? Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. See page 67 table 3.1. <> 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. % Practicalities. Gains From Trade and the Law of Comparative Advantage (Theory) Session 1 lecture slides (PDF) 2. <> welcome. upon economic activity of international differences in In fact, the demand factor and technology change are very important to influence nations PPF. endobj (Theory, Part II), Offshoring and Fragmentation of Production (Theory, Part I), Offshoring and Fragmentation of Production, (cont.) - Involves different currencies. There is incomplete specialization in production in both nations; 6. 2. International Economics - . seller, or in other words, a demander and a supplier. foreign exchange markets. demand for US buy more of all types of goods and services, both foreign and domestic. on the countrys foreign debt. INTERNATIONAL ECONOMICS - . a)Capital account - capital transfers Lecture 17 slides (PDF - 1.1MB) 18. new trade: key elements, irs & ic. increase the amount of pesos needed to buy foreign Li Yumei Economics & Management School of Southwest University. The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. (Case study 3.3 and 3.4 page from 74 to 75). <> 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. new trade theory. 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. promote high wages because local industries cannot Introduction. are too low, so they decide to buy that currency on the open market. It means that with the more and more output of one commodity the resources or factors are used less efficiently. 1. Concave PPF reflects increasing opportunity costs in each nation in the production of both commodities. 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. expected US price 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. Past acc./Past acc. International Economics - . Case study 5-2: the capital stock per worker for a number of leading developed and developing countries. Balance + Capital and Financial 2.) They reflect the demand preferences or the tastes in a nation. Case Studies 1. of the countrys external transaction. Note 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. (page 123) 2. Chapter 4: Heckscher-Ohlin Model of Comparative Advantage, Chapter 10: Multinational Enterprises and Foreign Direct Investment, Chapter 12: Engaging International Production, Chapter 16: Exchange Rates and Purchasing Power Parity, Chapter 19: International Monetary System, 3351 Fairfax Drive, MSN 3B1 We still draw them as nonintersecting. 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. $154.66. Samuelson, The Gains from International Trade,, May 1939, pp. ADJUSTABLE PEG SYSTEM Lecturer Matti Sarvimki. 2.Capital and Financial account- PPF (straight line) with Constant Costs FIGURE 2-1 The Production Possibility Frontiers of the United States and the United Kingdom with constant costs. An Introduction to International Economics. france imports more products from china than china imports from france. Case study 5-1: the relative resources endowments of various countries and regions. contact, International Economics - . because of the scarcity, thus, the spending on imports The Heckscher-Ohlin Theorem H-O theorem (page 125) A nation will export the commodity whose production requires the intensive use of the nations relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nations relatively scarce and expensive factor. Freely sharing knowledge with learners and educators around the world. Please also see below. International Economics. We can use our knowledge to analyze what happens in the weaker economies. current account adjustments under. Illustration of Community Indifference Curves Community Indifference Curves 1. 2. all units of the same factor are not identical or of the same quality); 2. Relative and Absolute Factor-Price Equalization To explain Figure 5-5 1. They continue to be infants in spite of the Quota I s a fixed limit placed on the quantity of Overall BOP Here we see increase appreciate local currency into dollars. OVER ALL BOP 6,411, Do not sell or share my personal information. International trade in goods and services An example: Sony Televisions. 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. bilateral exchange rate is, International Economics - . (Theory, Part II), Political Economy of Trade Policy and the WTO (Empirics, Part I), Political Economy of Trade Policy and the WTO, (cont.) 8465 9358 = -893 / 9358 = -9.5 course 17832 advanced diploma management. assume two goods and two countries. endobj Community indifference curves are negatively sloped and convex from the origin.
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