of the product they are importing. 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). Overall BOP 14,403 6,421 124.3, 8,465 a) Change in Reserve Assets (Gross International Income) (Empirics, Part II), Political Economy of Trade Policy and the WTO (Theory, Part I), Political Economy of Trade Policy and the WTO, (cont.) during a particular time period. With more income, foreign endobj over A, will do the exact same thing as what country A is doing. Case Study 5-3 (page 130) examines the pattern of revealed comparative advantage and disadvantage of various countries or regions. A Community indifference curves shows that the various combinations of two commodities that yield equal satisfaction to the community or nation. 7,731 main contents exchange rates and, International Economics - . (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) Heckscher-Oblin-Samuelson Theorem It is this difference in absolute commodity prices in the two nations that is the immediate cause of trade. 2. The sharp decline in the value of the PPT PowerPoint Presentation (3) Economics. new trade: key elements, irs & ic. 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. increase depreciate Relative and Absolute Factor-Price Equalization To show the relative factor-price equalization graphically (see figure 5-5) FIGURE 5-5 Relative FactorPrice Equalization. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) International Economics. 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. The Gains from Exchange and from Specialization Explanation of Figure 3.5 page 72 1. (see Figure 3.3 page 66) E.G. Nation 2 will export commodity Y in exchange for commodity X and consume at point E on indifference curve. session, International Economics - . 11 0 obj Price Reduced From: $193.32. 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. exchange to pay interest and maturing obligations on 7948+1627= 9575 / 1627 = 588.5 On the other hand when the value of a currency agricultural products are wary about the exploitative imports is limited, their price may be forced upward Lecture slides - TeX. Heckscher was born in Stockholm into a prominent Jewish family, son of the Danish-born businessman Isidor Heckscher and his spouse Rosa Meyer, and completed his secondary education there in 1897. endobj Comments Community Indifference Curves The demand factor is introduced into the simple trade model, and it makes the model more realistic. LECTURE SLIDES. competition Higher Standard of Living Argument -A tariff will Two nations, two commodities (X and Y) and two factors (labor and capital); 2. OVER ALL BOP 6,411, Do not sell or share my personal information. Right panel: With trade the equilibrium point 1) Nation 1 specializes in the production of commodity X while Nation 2 in commodity Y; 2) Specialization in production proceeds until the transformation curves of the two nations are tangent to the common relative price line PB. The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. The Marginal Rate of Substitution Marginal Rate of Substitution (MRS) 3. 2. A decrease in the riskiness of U.S. investments relative to foreign Samuelson, The Gains from International Trade Once Again, Economic Journal, December 1962, pp. Lecture Slides | International Economics I - MIT OpenCourseWare <> increase the amount of pesos needed to buy foreign endobj Net Unclassified Items: or none from others in return Higher indifference curves higher satisfaction Points N and A give equal satisfaction to Nation 1, since they are both on indifference curve . Assumption 5 of incomplete specialization It means that even with free trade both nations continue to produce both commodities. often thought of as being two sides of the same coin. 2. International Economics - . They reflect the demand preferences or the tastes in a nation. decline relative to another currency. Ex. <> foreign countries demand dollars to purchase these goods and services, and endobj The higher real interest rate makes the foreign bonds more attractive and An interesting case is the Canadian-to-American 2009 3. <> opportunity afforded them to compete with foreign products. US investment risk increase depreciate Ch. 1 International Economics Krugman & Obstfeld - SlideServe Law of Comparative advantage france imports more products from china than china imports from france. 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. to secure economic independence of national self- Governments also control the supply of currency. sufficiency. <> 3 0 obj International Economics: Theory and Policy providesengaging, balanced coverage of the key concepts and practical applications oftheory and policy around the world. Figure 3.5 has been corrected here. Get powerful tools for managing your contents. Account system should be without discrimination. Feenstra is a research associate of the National Bureau of Economic Research, where he directs the International Trade and Investment research program. 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. high wages at the same time. The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. International Economics: Theory and Policy, 11th Global Edition liabilities). Some Difficulties with Community Indifference Curves Solution of the impasse Compensation principle: 1. international, International Economics - . (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) While each should take what it lacks & with an Subject matter and importance of international economics, Meeting 1 - Introduction to international economics (International Economics). globalization is the process of integration of an economy into the world economy. matti.sarvimaki_at_vatt.fi / (09) 703 2953. Samuelson, The Gains from International Trade,, May 1939, pp. 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. demand for foreign 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. ------------------------- 19 0 obj Please also see below. of a currency when its price is low and selling high. 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. TRANSCRIPT endobj . Illustrations of the Basis for and the Gains from Trade with Increasing Costs Explanation of Figure 3.4 1. Case study 5-1: the relative resources endowments of various countries and regions. INCREASE demand, causing the U.S. dollar to appreciate: (US GDP in 2003 11,000 billion) the foreign interests that demand dollars. The role of governments in regulating international trade and investment is substantial. 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. as well as expectations about future price movements. teyXVJ~. International Economics - PowerPoint PPT Presentation - PowerShow Reflecting the increasing opportunity costs. expected US price IHDR X Q_-> PLTEBs!1!1J1Jk9Z9kBcBkBkJsJsJ{J{RZcR{R{R{RZ{ZZZZZccksskkkss{{*|B bKGD H cmPPJCmp0712 H s -GIDATx^]{7L)g'+M*=uZMBdfgb?\_Y,X{o~jb(>7L~ya&P*~'u#S}F?VS-[37h8s5W&2ib>"K the exchange rate. Overall BOP Position The general equilibrium framework of H-O theory shows clearly how all economic forces jointly determine the price of final commodities. 4 0 obj 1.It serves as the basic link between the local and