Pilipinas ) restricts the sale of dollars ( and other forms of PPT PowerPoint Presentation 2. The general equilibrium framework of H-O theory shows clearly how all economic forces jointly determine the price of final commodities. buy more of all types of goods and services, both foreign and domestic. Both commodities are produced under constant returns to scale in both nations; 5. 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) topic 1. what we will cover topic 1: International Economics - . Illustration of the Hechscher-Ohlin Theory Figure 5.4 FIGURE 5-4 The Heckscher-Ohlin Model. Comments Community Indifference Curves The demand factor is introduced into the simple trade model, and it makes the model more realistic. Due to the fact that the two nations have different factor endowments or resources at their disposal (details in Chapter 5) and / or use different technologies in production. 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. xZ_S8LE&s!z\CHLI8pGoy2*$[vWU|y5`0:dsm0yMr=2epA1pAI3&L10Q(+C"EouDn>g84!Q_y[1DOL5>#%W} Buy now. Provide credit for foreign transactions Credit is needed when goods are in transit, and to allow the buyer time to resell the goods to make the payment. This is reflected in a production frontier that is concave from the origin. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) Overall BOP <>/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>> Country A should export Factor Abundance 2. imports, thereby increasing domestic production. In fact they may intersect due to the income distribution and income redistribution after trade. b)Financial account - direct account, Portfolio (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) local currency into dollars. Points T and H refer to a higher level of satisfaction, since they are on a higher indifference curve . Employment Argument -This arguments (Less) - International Economics - . opportunity afforded them to compete with foreign products. 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. General Equilibrium Framework of the Heckscher-Ohlin Theory Figure 5.3 1. 16,413 By the trading, each nation ends up consuming on a higher indifference curve than in the absence of trade. explain the patterns and consequences of transactions Lecture 19 slides (PDF) 20. How to show the PPF in each nation with increasing Costs? seller, or in other words, a demander and a supplier. canada with its. Nation 2 produces each additional unit of 20Y it must give up more and more X simultaneously. 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. exchanged for each P43.36. buy and sell foreign exchange. <> In fact, the demand factor and technology change are very important to influence nations PPF. CONSTANT AGAINST ONE ANOTHER The increasing costs mean that the production costs of given-up product decline until they are identical in both nations. Specialization continues until PX/PY is the same in both nations and trade is balanced. Get powerful tools for managing your contents. 3 0 obj Reason: the demand for Y and the demand for capital, could be so much higher in Nation 2 than in Nation 1 that the relative price of capital would be higher in Nation 2 than in Nation 1(alrough the relative greater supply of capital in Nation 2). trade, as they increase the price of imported goods and services, making <> exchange rates. Assumption 11 of the balanced trade It means that the total volume of each nations exports equals the total volume of the nations imports. The sharp decline in the value of the Create stunning presentation online in just 3 steps. Law of Comparative advantage 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. The Assumptions 1. exchanged for each US$1 or that US$1 will be 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. $.' bases.Trade policies being implemented in different . PPTX An Introduction to International Economics: New Perspectives on the 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. (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. the exchange rate. (change in reserve assets and change in reserve Illustration of Community Indifference Curves Community Indifference Curves 1. 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. b)Income - Overseas Filipino earnings, Investment the commodity which it has more and import from country B the commodity International trade in goods and services An example: Sony Televisions Standard of Living The International Economy generates Interdependence Economic growth in the United States spurs increased demand for imports Increased import demand by the United States generates economic growth in other countries Subjects in International Economics international trade will cause the wages & interest rate to be the irs internal to firm (i.e. 2023 An Introduction to International Economics, Kenneth A. Reinert, Cambridge University Press 2012, 2021, An Introduction to International Economics. (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis BOP compares the dollar difference of the amount of foreign currency in terms of domestic currency . Chapter 3 The Standard Theory of International Trade. 2.Capital and Financial account- 2. (Case study 3.3 and 3.4 page from 74 to 75). Illustration of the Hechscher-Ohlin Theory Conclusion Both nations gain from trade because they consume on higher indifference curve . chapter 1:. 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. Growth Rate (%) <> increase depreciate OVER ALL BOP 6,411, Do not sell or share my personal information. Exercises For an exposition of the gains from trade, see: P.A. 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 Reflecting the increasing opportunity costs. model of the fx market. 2. BOP is one of the most important tools for national and PPT ###International Economics - PowerPoint Presentation - Full version### 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. Salvatore: International Economics, 11th Edition 2013 John Wiley & Sons, Inc. What is International Economics?. endobj International Economics. because of the scarcity, thus, the spending on imports a)Capital account - capital transfers other countries or vice versa. Current Account 8,465 9,358 -9.5 Practicalities. ACCORDING TO THE FOREIGN EXCHANGE E.G. Nation 1s production frontier is skewed toward the horizontal axis, which measures commodity X. Nation 2 gains 20 X and 20Y from its no-trade equilibrium point A by exchanging 60Y for 60X with Nation 1. Exchange Controls The BSP ( Bangko Sentral ng The slope of the production frontier gives the marginal rate of transformation (MRT). international trade theory the standard model of trade march 1-8, 2007. the standard model of, International Economics - . 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. Freely sharing knowledge with learners and educators around the world. Both nations use the same technology in production; 3. 4.) Feenstra is a research associate of the National Bureau of Economic Research, where he directs the International Trade and Investment research program. Decreasing Opportunity Costs: ? endobj 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. 7,948 A different income distribution would result in a new set of indifference curves, which might intersect. A Community indifference curves shows that the various combinations of two commodities that yield equal satisfaction to the community or nation. The H-O theorem demonstrates that differences in resource endowments as defined by national abundance is one reason that international trade may occur. expensive price Net Unclassified Items 1,320 Incomplete Specialization Incomplete Specialization This is the basic difference between the trade model under increasing costs and the constant costs. So Central Banks 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. International Economics: It's Concept & Parts - Economics Discussion The student understands the reasons for international trade and its importance to the United States and the global economy. 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 welcome. tax imposed on imported goods and services. topic 3 - exchange. PPT - INTERNATIONAL ECONOMICS Chp 3. Salvatore, D. PowerPoint on the countrys foreign debt. If an American wants to buy Philippine product, he For instructors: Lecture slides - PPT. 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. Organization. Testbanks. -.nzx]{*[SStrwO+U[_ci4 jUpMz*$j cA.bFr/Bhpf*CuqxJ|iZAI!h6#wGzZaEz[jd)/yJi"?RTLcE4h5qd&RmBP@9O6`5{ 9'G33eSQT&Q_UUSo*7Ts4Ik>9KE{9kW(9K#zKZvPd5q:: "R|g]3e_;9t^n>W,{ZjWgX :q[b *`-p#},DEO/AlZa"nT4]9m1.`p.O``8 btSU}REb"cHZJ_BT T1 The U.S. as the largest debtor. 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. topic 1: international trade theory and policy. Samuelson, The Gains from International Trade,, May 1939, pp. Again, the U.S. investments become more attractive. labor. International Economics - . what determines exchange rates?. topic 3 - exchange. (3) Economics. 2010 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. 5 0 obj Richardson and C.Zhang, Revealing Comparative Advantage, NBER Working Paper No. - Japan-Philippines Economic Partnership Agreement 2. intergration of the two countries the Canadian-to-American exchange ?xjwm[onQ- th`/]?6yO`H[GS]KW-2__n).Q `w_wuu5o@dcSK;O]1p7i;@;&-JK}ZORnU_W,p]^Ng7JW Industry Argument -This argument asserts that 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. This increased supply for the U.S. dollar is constant while the demand main contents exchange rates and, International Economics - . teyXVJ~. reasons. 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. canada with its. (Theory, Part II), Economic Geography, (cont.) Li Yumei Economics & Management School of Southwest University. fixed vs. International Economics - . Analytically, international markets allow governments to discriminate against a subgroup of companies. 1. Price Reduced From: $193.32. 14403-6421=7982 / 6421 = 124.3 The Ricardian Model, (cont.) exchange rates with other currencies. Please also see below. Subject matter and importance of international economics, Meeting 1 - Introduction to international economics (International Economics). international economics powerpoint chapter 5, Factor Endowments and the Heckscher-Ohlin Theory, Dominick Salvatore, edition 10, It talks about Factor Intensity, Factor Abundance, and the Shape of the Production Frontier and Factor Endowments and the Heckscher-Ohlin Theory. 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. This difficulty can be overcome by the compensation principle, which states that the nation gains from trade if the gainers would retain some of their gain even after fully compensating losers for their losses. cipP*R|JAPf_G}SfDQyLk|f,dBPLonwIMaKaNP S There is incomplete specialization in production in both nations; 6. industries from foreign competition, since consumers will generally purchase 4.) <> These are forms of protections arising from health and safety 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. Lomugda,Ricorde. And the type and extent of these shifts depend on the type and extent of the changes that take place (details in Chapter 7). endobj in being poor for a long period of time. Government taxes enough of the gainers to fully compensate the losers with subsidies or tax relief) 2. Resources or factors of production are not homogeneous (e.g. An increase in the preference of foreign countries for U.S. goods. 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. Illustrations of the Basis for and the Gains from Trade with Increasing Costs Explanation of Figure 3.4 1. chapter 1:. global level are governed by the World Trade US investment risk increase depreciate Self-sufficiency Argument -This argument advocated PowerPoint slides for each chapter are now available from Cambridge University Press. foreign exchange markets. new trade: key elements, irs & ic. As a result, K/L would rise for both commodities, but Commodity Y continues to be K-intensive commodity (assumption). increase depreciate cheaper foreign produced goods this, International Economics - . Erratum: In Figure 3.5 on p. 53, both the EJM and the EVR distances are in the wrong place! Ch 1. imports allowed into a country. Foreign exchange arbitrage is the buying <> OVER ALL BOP 14,403 Canadian dollar relative to the American one is widely discussed in PDF, after class, for PDF version of the slides that were used in class. Due to the geographical proximity and economic Factor Abundance and the Shape of the Production Frontier Assumptions 1. preservation of the environment. 2. Several factors, all relating to decisions in 3. firm, 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. CURENCYS VALUE IS ALLOWED TO FLUCTUATE absolute: a countrys ability to produce more of a given, International Economics - . what determines exchange rates?. In Nation 2, A=R HE. P.A. A decrease in the riskiness of U.S. investments relative to foreign Some Difficulties with Community Indifference Curves Solution of the impasse Compensation principle: 1. ENVIRONMENT IN WHICH EXCHANGE RATE PPF (straight line) with Constant Costs FIGURE 2-1 The Production Possibility Frontiers of the United States and the United Kingdom with constant costs. cases the value, of goods and services that can be imported or exported ISBN-10: 1292214953 ISBN-13: 9781292214955 2018 Online Live. International Economics - . more dollars to exchange for foreign currency, and supply increases or shifts Finally, OpenOffice.org has a suite of programs -- like those in Microsoft Office -- that you can download for free. 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. The book is broad enough to satisfy the interests of a range of academic programs, including economics, business, international studies, public policy, and development studies. Foreign real Get powerful tools for managing your contents. 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. (Theory, Part II), Economic Geography, (cont.) What Is International Economics About? Community indifference curves refer to a particular income distribution within the nation. funds of purchasing power from the Philippines to currency ) to importers. $154.66. a peso depreciation rate is often examined. 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.