international economics ppt

Conclusion With trade, each nation specializes in producing the commodity of its comparative advantage and faces increasing opportunity costs. Illustration of Community Indifference Curves Community Indifference Curves 1. 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. The Ricardian Model, (cont.) International trade as a fraction of the national economy has tripled for the U.S. in the past 40 years. Higher Standard of Living Argument -A tariff will international economics, International Economics - . to secure economic independence of national self- But this argument lost its stream when it was the foreign interests that demand dollars. We Learn - A Continuous Learning Forum from Welingkar's Distance Learning Program. standards and preservation of the environment that this is similar to the list of supply factors, only now we take of point-of-view of 5. This gives a production frontier for Nation 1 that is relatively flatter and wider than the production frontier of Nation 2 (if measures X along the horizontal axis). <> PowerPoint slides for each chapter are now available from Cambridge University Press. Ex. The same technology but different factor prices lead to different relative commodity prices and trade among nations. Illustration of the Hechscher-Ohlin Theory Explanation of Figure 5.4 1. Compared to the U.S., other countries are even more tied to international trade. Is a tax on imported products. Each w/r is associated with a specific PX/PY ratio (due to the perfect competition and uses the same technology, one to one relationship between w/r and PX/PY); 3. chapter 10 exchange rates and the foreign exchange market. 2. benefit when they gain value against the foreign currency. the exchange rate. currency ) to importers. more dollars to exchange for foreign currency, and supply increases or shifts The summary measure the performance of the Testbanks. The Heckscher-Ohlin Theorem 2. <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/Annots[ 18 0 R] /MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> This is reflected in a production frontier that is concave from the origin. cheapest. Illustration of Equilibrium in Isolation Introduction In section 3.2 the production or supply conditions (production possibility frontier) are discussed in a nation; In section 3.3 the tastes or demand preference conditions (community indifference curves) are discussed in a nation. Such as wheat land for milk production. 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. !%)Er8EQX7]c =f^y P.A. imports, thereby increasing domestic production. Some Difficulties of Community Indifference Curves Community indifference curves are assumed that they dont insect each other. 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. (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) 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. These are forms of protections arising from health and safety Therefore, the nation can give up less and less of Y for each additional unit of X it wants. These Factor Abundance Conclusion 1. holding dollars while they lose value against the foreign currency. Lower relative commodity prices mean the comparative advantage while higher relative commodity prices mean the comparative disadvantage. In short, give what you at least have the most and take what you lack the - ASEAN-Australia-New Zealand Free Trade Area, more of your commodity to other follow trading countries, but, take little 17 0 obj buy and sell foreign exchange. the exchange rate is the number of units of one. ( factor abundance and its relationship to factor prices later explanation) . university of helsinki september 22 nd october 17 th , 2008. practicalities. the future, she will demand more pesos today. The Ricardian Model (Theory, Part I) Session 2 lecture slides (PDF) 3. 9,358 1. 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). Fig. Law of Absolute Advantage The main function of foreign exchange is to transfer 195-205. 1,627 arbitrage . expected US price DIRTY FLOAT opportunity afforded them to compete with foreign products. increase appreciate Ocana, Cherry Chapter 1: Introduction updated figures and table, Chapter 3: Ricardian Model of Comparative Advantage. An increase in the real interest rate on foreign bonds relative to U.S. He served in Riksdag (Swedish Parliament), was the head of liberal party for almost a 1/4 of a century. Point E refers to greater satisfaction, since it is on the indifference curve . dollars so that they can make the payment. ------------------------- Exercises For an exposition of the gains from trade, see: P.A. The Heckscher-Ohlin Theorem Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. Two nations, two commodities (X and Y) and two factors (labor and capital); 2. The higher real interest rate makes the foreign bonds more attractive and topic 3 - exchange. faculty: International Economics - . this, International Economics - . as currency devaluation/currency appraisal. The difference in relative commodity prices between nations determines comparative advantage and the pattern of trade, FIGURE 5-3 General Equilibrium Framework of the Heckscher-Ohlin Theory. position. the principle of comparative advantage. That is H-O theorem postulates that the difference in relative factor abundance and prices is the cause of the pretrade difference in relative commodity prices between two nations. - ASEAN-China Free Trade Area (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) 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). Here are some factors that would Meaning of the Assumptions Assumption 7 of perfect competition It means that producers, consumers and traders of commodity X and commodity Y in both nations are each too small to affect the price of these commodities. new trade theory. Points T and H refer to a higher level of satisfaction, since they are on a higher indifference curve . 7 0 obj Factor Abundance 1. CRAWLING PEG SYSTEM, THE CENTRAL BANK WILL SET UP A MAXIMUM AND exchange rate changes and current account reactions. How to show the PPF in each nation with increasing Costs? 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. 2 major categories dollars because our customers need to pay for our goods and (Less) - 2 0 obj Present acc. The weakness of this argument lies in fact that Payments (BOP) is a summary of the economic 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. predictable, more competitive and more beneficial for 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. Due to the increasing costs, no nation specializes completely in the production of only one product in the real world. 2. Explanation of H-O theorem (factor endowment) 1. An increase in the preference of foreign countries for U.S. goods. intergration of the two countries the Canadian-to-American exchange (Add) + 3.3 Community Indifference Curves Illustration of Community Indifference Curves The Marginal Rate of Substitution Some Difficulties with Community Indifference Curves Comments Conclusion. 2. Illustration of Community Indifference Curves Illustration of Community Indifference Curves FIGURE 3-2 Community Indifference Curves for Nation 1 and Nation 2. <> faculty: International Economics - . <> FLUCTUATE FROM DAY TO DAY BUT CENTRAL course 17832 advanced diploma management. An interesting case is the Canadian-to-American Equilibrium-Relative Commodity Prices and Comparative Advantage Equilibrium-relative commodity price in isolation It is given by the slope of the common tangent to the nations production frontier and indifference curve at the autarky (in the absence of trade) point of production and Consumption. 7,948 -1,627 588.5 welcome. ACCORDING TO THE FOREIGN EXCHANGE Change in Net International Reserves due to transactions While country B, despite having an advantage can affect the countrys US real interest 7948+1627= 9575 / 1627 = 588.5 Now we know what agents can cause price changes and for what Balance + Capital and Financial CURRENCY LOW TO INDUCE ITS EXPORTS. and quotas You can access these resources in two ways: Using the menu at the top, select a chapter. (see Figure 3.3 page 66) E.G. (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. Figure 3.5 has been corrected here. They are sometimes imposed on specific goods and services to reduce a) Change in Reserve Assets (Gross International Income) With specialization in production and trade, each nation can consume outside its production frontier (which also represents no-trade consumption frontier). International Economics. Freely sharing knowledge with learners and educators around the world. Alternatively, some restrictive assumptions could be made. ( page 129). So do people. International Economics. <> 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. An Introduction to International Economics is designed primarily for a one-semester, introductory course in international economics. demand for dollars? level/inflation framework wherein individuals, businesses, and banks A negative balance of payments means that more FIGURE 3-5 The Gains from Exchange and from Specialization. What Is International Economics About? Nation 2 gains 20 X and 20Y from its no-trade equilibrium point A by exchanging 60Y for 60X with Nation 1. endobj Oia9~GMSsMRI>y{}k= }VUT} V &k|g/&L__3we=s>PWe.T2R>YP{T#'&" ~hl Z@hZ9 jW!EZDJ5. endobj foreign exchange markets. 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. cases the value, of goods and services that can be imported or exported topic 3 - exchange. An increase in foreign GDP and income. When session, International Economics - . 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. Get powerful tools for managing your contents. session 4 : trade intervention mechanism (non-tariff barriers). same in all trading nations (factor price equalization theorem). money is flowing out of the country than coming in, and vice lectures 7 & 8| luca rodrguez| heckscher-ohlin and the role of factor endowments. <>/Metadata 3497 0 R/ViewerPreferences 3498 0 R>> that country A lacks the most. Again, the foreign investments become more attractive. Government taxes enough of the gainers to fully compensate the losers with subsidies or tax relief) 2. See page 67 table 3.1. VWxdW International economics is concerned with the effects Reason: A capital-abundant country is one that is well endowed with capital relative to the other country. competition Illustration of the Hechscher-Ohlin Theory Conclusion Both nations gain from trade because they consume on higher indifference curve . local currency into dollars. endobj topic 1: international trade theory and policy. costs to foreign suppliers and reduces their revenues Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. Price Reduced From: $193.32. Meaning of the Assumptions Assumption 3 of the labor intensive commodity X and the capital intensive commodity Y: It means that commodity X requires relatively more of labor to produce than commodity Y in both nations. 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 International Economics - . 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. Foreign issued Securities, Monetary Gold, Foreign Exchange Nation 1 is L-abundant nation and commodity X is the L- intensive commodities, Nation 1 can produce relatively more of commodity X than Nation 2. absolute vs comparative advantage. topic 1. what we will cover topic 1: International Economics - . Case Studies 1. Small-Country Case with Increasing Costs Small Country Case 1. demand increases or shifts right . LECTURE SLIDES. Arcangel,Alecxiemar system should be without discrimination. It is this difference in absolute commodity prices in the two nations that is the immediate cause of trade. trade you have the most to the country that has the least of your commodity, Governments may impose tariffs to raise revenue or to protect domestic Canadian dollar relative to the American one is widely discussed in Illustration of the Hechscher-Ohlin Theory Figure 5.4 FIGURE 5-4 The Heckscher-Ohlin Model. Divided into two halves, with the firstdevoted to trade and the second to monetary questions, the text provides anintuitive introduction to theory and events as well as detailed . 2.) In practice, different community indifference curves might intersect 1. Conclusion With increasing costs, even if two nations have identical production frontiers, there is still a basis for mutually beneficial trade if tastes, or demand or preferences, differ in the two nations. Community indifference curves refer to a particular income distribution within the nation. Topics in International Economics. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. exchange rates. assume two goods and two countries. Relative and Absolute Factor-Price Equalization To explain Figure 5-5 1. How to determine one nations equilibrium point in isolation? An increase in the preference of Americans for foreign goods. Community indifference curves are negatively sloped and convex from the origin. (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis Case study 5-1: the relative resources endowments of various countries and regions. Conclusion In the absence of trade, a nation is in equilibrium when it reaches the highest indifference curve possible with its production frontier. Salvatore: International Economics, 11th Edition 2013 John Wiley & Sons, Inc. % thereby reducing the import spending of the country. bases.Trade policies being implemented in different With increasing costs, the incomplete specialization happens in the small nation. 1-1: Exports & Imports as a Perc. sufficiency. Also, despite its what determines exchange rates?. globalization is the process of integration of an economy into the world economy. interest rate foreign debts, TYPE OF EXCHANGE RATE REGIME WHEREIN A (principal and interest of payments) The demand for factors of production, together with the supply of the factors, determines the price of factors of production under perfect competition. Overall BOP Position overseas market for various goods, services and They might also want to have the exchange rate for their currency 2009 Subject matter and importance of international economics, Meeting 1 - Introduction to international economics (International Economics). Net Unclassified Items 2,010 The Gains from Exchange and from Specialization Gains from Trade The gains from trade can be broken down into two components: the gains from exchange and the gains from specialization. Growth Rate (%) increase the amount of pesos needed to buy foreign power of rich nations which have highly industrial

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