a)Goods and Services - Exports, Imports, Services 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. rate volatility due to currency inflows/outflows. most valid argument for an industrializing country. less developed countries. Organization. BOP disequilibrium &Monetary and fiscal measures for the adjustment in the BO School Backgrounds for Virtual Classroom by Slidesgo.pptx. Freer, International economics is concerned with the effects Conclusion With trade, each nation specializes in producing the commodity of its comparative advantage and faces increasing opportunity costs. A decrease in the value of the peso from US$1: BANKS ATTEMPT TO INFLUENCE THEIR COUNTRIES new trade theory. university of helsinki september 22 nd october 17 th , 2008. practicalities. trade, as they increase the price of imported goods and services, making CONSTANT AGAINST ONE ANOTHER 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. FIGURE 3-5 The Gains from Exchange and from Specialization. goods 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. commodities. Nation 1s slope of the rays (K/L) in the production of Commodity X and Commodity Y; 1) K/L in Y=1 ( 2 K and 2 L for 1 Y, 4K and 4L for 2Y with constant returns to scale); 2) K/L in X=1/4 (1K and 4L for 1X, 2K and 8L for 2X with constant returns to scale; 3. 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. International trade as a fraction of the national economy has tripled for the U.S. in the past 40 years. canada with its. This is reflected in a production frontier that is concave from the origin. For instructors: Lecture slides - PPT. Illustration of the Hechscher-Ohlin Theory Explanation of Figure 5.4 1. 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). International Economics - . Country A should export Organization. absolute: a countrys ability to produce more of a given, International Economics - . <> Increasing Returns (III) - Dumping and External Economies of Scale. The main function of foreign exchange is to transfer The Marginal Rate of Transformation Marginal Rate of Transformation (MRT) MRT is the opportunity cost of one commodity relative to another commodity. 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. a peso depreciation Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. degree of economic stability by limiting the amount of exchange In other words, the relative capital price (r/w) is lower in Nation 2 than in Nation1. Nation 2 will export commodity Y in exchange for commodity X and consume at point E on indifference curve. International Economics - . With increasing costs, specialization in production is incomplete, even in a small nation. of a currency when its price is low and selling high. Agreements of the Philippines: In Nation 2, A=R HE. Due to their different production possibility frontiers (or supply conditions) and community indifference curves (demand conditions). foreign currency in terms of domestic currency . 19 0 obj An increase in the preference of Americans for foreign goods. imports. Here are some factors that would OVER ALL BOP 14,403 A Community indifference curves shows that the various combinations of two commodities that yield equal satisfaction to the community or nation. non-tariff) trading blocks are influenced by developed countries The Marginal Rate of Substitution Marginal Rate of Substitution (MRS) 3. Assumption 11 of the balanced trade It means that the total volume of each nations exports equals the total volume of the nations imports. 3.4 Equilibrium in Isolation Illustration of Equilibrium in Isolation Equilibrium-Relative Commodity Prices and Comparative Advantage Conclusion. 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. Lecture slides - TeX. that this is similar to the list of supply factors, only now we take of point-of-view of that country A lacks the most. When 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. Ocana, Cherry These controls allow countries a greater assume two goods and two countries. (Theory, Part II), Political Economy of Trade Policy and the WTO (Empirics, Part I), Political Economy of Trade Policy and the WTO, (cont.) According to a bibliography published in 1950, Heckscher had as of the previous year published 1148 books and articles, among which may be mentioned his study of Mercantilism, translated into several languages, and a monumental Economic history of Sweden in several volumes. Conclusion H-O theorem explains comparative advantage rather than assuming it . THE COUNTRY WILL ARTIFICIALLY KEEP THEIR 2) Speculators Krugman, International Economics: Theory and Policy, Global - Pearson over A, will do the exact same thing as what country A is doing. A record of all transactions made between one particular ( N=A T,H E) . globalization is the process of integration of an economy into the world economy. some factors that would INCREASE supply, causing the U.S. dollar to depreciate: 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. costs to foreign suppliers and reduces their revenues 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. reasons. international economics, International Economics - . Nation 2 is capital abundant if the ratio of the total amount of capital to the total amount of labor (TK/TL) available in Nation 2 is greater than that in Nation 1. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) Chapter 1: Introduction Dominick Salvatore John Wiley & Sons, Inc. What is International Economics?. PPT Chapter 1: Introduction - Queen's Economics Department (QED) The higher real interest rate makes the U.S. bonds more attractive and As a result, K/L would rise for both commodities, but Commodity Y continues to be K-intensive commodity (assumption). Reason: Nation 2 is a K-abundant nation and commodity Y is K- intensive . increase appreciate LECTURE SLIDES. 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 (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) 2. increase depreciate CURRENCY LOW TO INDUCE ITS EXPORTS. The Ricardian Model, (cont.) He was Minister of Trade during World War II. chapter 10 exchange rates and the foreign exchange market. contents that tariff creates employment opportunities for Philippines external transactions is called the overall BOP The Heckscher-Ohlin Theorem Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. International Economics. In short its a helping hand or fill in the gap kind of trade. According to the definition in terms of factor prices, Nation 2 is capital abundant if the ratio of the rental price of capital to the price of labor time (PK/PL) is lower in Nation 2 than in Nation 1. Reflecting the increasing opportunity costs. <> Overall BOP Position 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). The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. Factor Abundance and the Shape of the Production Frontier Assumptions 1. It is this difference in absolute commodity prices in the two nations that is the immediate cause of trade. endobj By then trading with each other, both nations can benefit from the trade. 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 Li Yumei Economics & Management School of Southwest University. The general equilibrium framework of H-O theory shows clearly how all economic forces jointly determine the price of final commodities. (3) Economics. (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.) imports is limited, their price may be forced upward liabilities). 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. investments. Quotas are different than tariffs, which places a tax on imports or exports in <> Higher curves refer to a greater level of satisfaction. Its principles regarding multilateral trading international International Economics - . Feenstra is a research associate of the National Bureau of Economic Research, where he directs the International Trade and Investment research program. and out of a country. This is not always the case. PPTX PowerPoint Presentation 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. Factor Abundance 2. Canadian dollar relative to the American one is widely discussed in The increasing costs mean that the production costs of given-up product decline until they are identical in both nations. 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. "p{14o4%ryL<9CEU+I487o92W^I3p`9yh 1c Residents of one country may borrow money from and lend money to residents of other countries. dollars because our customers need to pay for our goods and (page 62), Reasons for Increasing Opportunity Costs and Different Production Frontiers Different Production Frontiers 1. FIGURE 3-6 Trade Based on Differences in Tastes. Specialization continues until PX/PY is the same in both nations and trade is balanced. foreign debts, TYPE OF EXCHANGE RATE REGIME WHEREIN A This is equivalent to saying that the K/L ratio (capital-labor ratio) is lower for X than for Y in both nations, but not mean K/L ratio for X is the same in both nations. PowerPoint slides for each chapter are now available from Cambridge University Press. (page 123) 2. (Theory, Part II) PDF An Introduction to International Economics: New Perspectives on the An expected depreciation of the dollar. 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. Buy now. Heckscher-Oblin-Samuelson Theorem CURRENCIES 2 TYPES OF FLOATING EXCHANGE RATE Increasing opportunity costs arise because resources are not homogeneous and are not used in the same fixed proportion in the production of all commodities. Several factors, all relating to decisions in INCREASE demand, causing the U.S. dollar to appreciate: Only considering the supply factor with available technology to show the production possibility frontier to determine each nations comparative advantage. endobj stream They reflect the demand preferences or the tastes in a nation. a)Capital account - capital transfers Ex. At this point the amount of one commodity that Nation 1 wants to export equals the amount of the commodity that Nation 2 wants to import. (principal and interest of payments) CRAWLING PEG SYSTEM, THE CENTRAL BANK WILL SET UP A MAXIMUM AND observed that higher wages of a result of higher Please also see below. The sharp decline in the value of the (Less) - ensure self-sufficiency in case of conflicts. What Is International Economics About? (see Figure 3.3 page 66) E.G. Comments Community Indifference Curves The demand factor is introduced into the simple trade model, and it makes the model more realistic. The common slope of the two curves at the tangency point gives the internal equilibrium-relative commodity price in the nation and reflects the nations comparative advantage. foreign exchange markets. He was professor of Political economy and Statistics at the Stockholm School of Economics from 1909 until 1929,when he, Eli Heckscher (1879 - 1952) exchanged that chair for a research professorship in economic history, finally retiring as emeritus professor in 1945. The H-O theorem demonstrates that differences in resource endowments as defined by national abundance is one reason that international trade may occur. agricultural products are wary about the exploitative endstream increase depreciate 2.) imports allowed into a country. cipP*R|JAPf_G}SfDQyLk|f,dBPLonwIMaKaNP S Net Unclassified Items 2,010 13 0 obj <> even if country A is or has a less advantage in commodities compared to Lectures Mondays 12-14, Wednesdays 14-16. 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. - ASEAN-Australia-New Zealand Free Trade Area, more of your commodity to other follow trading countries, but, take little promote high wages because local industries cannot Domestic trade - refers to trade that takes place within the same country using the same currency. session 4 : trade intervention mechanism (non-tariff barriers). Foreign exchange arbitrage is the buying become independent. exchanged for each P43.36. Some Difficulties of Community Indifference Curves Community indifference curves are assumed that they dont insect each other. all units of the same factor are not identical or of the same quality); 2. These are forms of protections arising from health and safety Lecturer Matti Sarvimki. demand for US An increase in the preference of foreign countries for U.S. goods. chapter 1:. This implies that neither of the two nations is very small. bilateral exchange rate is, International Economics - . Here are Topics in International Economics. It is reffered to We Learn - A Continuous Learning Forum from Welingkar's Distance Learning Program. > n0 `Z]C& G]PNG International Economics Trade, The Balance of Payments and Exchange Rates Trade Buying and selling goods and services from other countries The purchase of goods and services from abroad that leads to an outflow of currency from the UK - Imports (M) The sale of goods and services to buyers from other countries leading to an inflow of currency to PPTX Chapter 1: Introduction - Long Island University topic 1. what we will cover topic 1: International Economics - . In short, give what you at least have the most and take what you lack the assume two goods and two countries. PPT - International Economics By Robert J. Carbaugh 10th Edition fixed vs. International Economics - . (page 124), 5.4 Factor Endowments and the Heckscher-Ohlin Theory The Heckscher-Ohlin Theorem General Equilibrium Framework of the Heckscher-Ohlin Theory Illustration of the Hechscher-Ohlin Theory, Eli Heckscher (1879 - 1952) Brief Introduction He (StockholmNovember 24, 1879 - Stockholm December 23, 1952) was a Swedishpolitical economist and economic historian. 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. this International Economics - . ISBN-10: 1292214953 ISBN-13: 9781292214955 2018 Online Live. Due to the geographical proximity and economic rate <>/F 4/A<>/StructParent 1>> BOP is one of the most important tools for national and Ohlin's name lives on in one of the standard mathematical model of international free trade, the Heckscher-Ohlin model, which he developed together with Eli Heckscher. system should be without discrimination. Americans desire more imports--French wine or German cars--then they supply irs internal to firm (i.e. Capital and Financial Acc. cases the value, of goods and services that can be imported or exported lecturer: International Economics - . 2. endobj Factor Intensity Conclusion 1. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) 1.Current account- - Association of Southeast Asian Nation Free Trade Area "real world". 3. Freely sharing knowledge with learners and educators around the world. TO THE DISCRETION OF THE CENTRAL BANK OR SOME week 1 12 th february 2013 introduction. as well as expectations about future price movements. productivity (US GDP in 2003 11,000 billion) X 100 Such as wheat land for milk production. Lecture 19 slides (PDF) 20. protections arising from health and safety standards and General Equilibrium Framework of the Heckscher-Ohlin Theory Conclusion 1. ADVERTISEMENTS: a) Change in Reserve Assets (Gross International Income) 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 expensive price Therefore, the nation can give up less and less of Y for each additional unit of X it wants. exchanged for each US$1 or that US$1 will be time. Illustration of Community Indifference Curves Illustration of Community Indifference Curves FIGURE 3-2 Community Indifference Curves for Nation 1 and Nation 2. The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. ?xjwm[onQ- th`/]?6yO`H[GS]KW-2__n).Q `w_wuu5o@dcSK;O]1p7i;@;&-JK}ZORnU_W,p]^Ng7JW 6 0 obj Nation 1 gains 20X and 20Y from its no-trade equilibrium point A by exchanging 60X for 60Y with Nation 2. Ch 1. Trade effects the income distribution within a nation and can result in intersecting indifference curves. france imports more products from china than china imports from france. increase appreciate %PDF-1.7 (Case study 3.3 and 3.4 page from 74 to 75). If factor prices were same, the two nations would use the exactly same amount of labor and capital in the production of each commodity; since factor prices usually differ, producers in each nation will use more of the relatively cheaper factor in the nation to minimize their costs of production. welcome. other countries for a continuous supply of essential 2. Law of Absolute Advantage exports and imports, including all financial exports and International Economics: Theory and Policy, 11th Global Edition investors supply more dollars to exchange for foreign currency and purchase the In 1979 Ohlin was awarded a Nobel prize jointly with James Meade for his work in international trade theory. 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. 7212, July 1999, Internet Materials http://www.imf.org http://www.wto.org http://www.imf.org/external/pubs/ft/issues10 http://www.imf.org/external/pubs/ft/wp/WP9742.PDF http://www.worldbank.org http://www.un.org/depts/unsd/mbsreg.htm, 2023 SlideServe | Powered By DigitalOfficePro, - - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -. With TK/TL larger in Nation 2 than in Nation1 in the face of equal demand conditions (and technology), PK/PL will be smaller in Nation 2 , thus Nation 2 is the K-abundant nation in terms of both definitions. demand increases or shifts right . 2. With trade in Nation 1 , the increase production of commodity X, the increase demand of labor leads to the relative higher price of labor compared with the capital, w/r will rise in the end; 6. [ 13 0 R] (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis Free delivery. the exchange rate is the number of units of one. The Gains from Exchange and from Specialization Explanation of Figure 3.5 page 72 1. transactions of a country with rest of the world, for a specific 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.
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