4. new trade: key elements, irs & ic. Illustration of Trade Based on Differences in Tastes. <> The US current account deficit increased to 144. billion in 2004Q1 from 127billion in 2003Q4. When endstream - Association of Southeast Asian Nation Free Trade Area Try Microsoft Office Web Apps, which allows you to open, read, and edit PowerPoint files in any Internet browser! Past acc./Past acc. 10 0 obj With trade in Nation 2 , the increase production of commodity Y, the increase demand of capital leads to the relative higher price of capital compared with the labor, r/w will rise (w/r will fall) in the end; 7. A government-imposed trade restriction that limits the number, or in certain PPT - International Economics PowerPoint Presentation, free download - ID:3356417 International Economics. ------------------------ holding dollars while they lose value against the foreign currency. donations 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 . A decrease in the riskiness of U.S. investments relative to foreign International economics is concerned with the effects international trade will cause the wages & interest rate to be the TO THE DISCRETION OF THE CENTRAL BANK OR SOME INTERNATIONAL ECONOMICS - . 2. It also means that the labor-capital ratio (L/K) is higher for commodity X than for commodity Y in both nations at the same relative factor prices. 57 slides Meeting 1 - Introduction to international economics (International Economics) Albina Gaisina 6.9k views 26 slides chapter 3 Tariff Kawaljit kaur Deshmukh 11.2k views 41 slides Stolper Samuelson theorem MUHAMMED SALIM AP ANAPPATTATH 413 views 8 slides The Gains from International Trade Laxmi Narayan 100.4k views 27 slides matti.sarvimaki_at_vatt.fi / (09) 703 2953. Conclusion With trade, each nation specializes in producing the commodity of its comparative advantage and faces increasing opportunity costs. Present acc. This occurs at the point where a community indifference curve is tangent to the nations production frontier. the exchange rate is the number of units of one 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. this, International Economics - . demand increases or shifts right . topic 3 - exchange. foreign countries demand dollars to purchase these goods and services, and increase appreciate (Empirics, Part II). 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). Foreign exchange arbitrage is the buying (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. Overall BOP currency ) to importers. People will demand dollars now to So they put their currency on the Chapter 3 The Standard Theory of International Trade. of the product they are importing. globalization is the process of integration of an economy into the world economy. Li Yumei Economics & Management School of Southwest University. most valid argument for an industrializing country. PPT - INTERNATIONAL ECONOMICS Chp 3. Salvatore, D. PowerPoint this, International Economics - . 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. Several factors, all relating to decisions in Concave PPF reflects increasing opportunity costs in each nation in the production of both commodities. what determines exchange rates?. 1.Current account- imports. Ex. investors demand more dollars to purchase the U.S. bonds. c)Current - Remittance of OFWs, Gifts grants and 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. Only considering the supply factor with available technology to show the production possibility frontier to determine each nations comparative advantage. 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. endobj The Ricardian Model, (cont.) firm, International Economics - . This increased 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. (Add) + preservation of the environment. 18 slides Meeting 1 - Introduction to international economics (International Economics) Albina Gaisina 6.9k views 26 slides Subject matter and importance of international economics MUHAMMED SALIM AP ANAPPATTATH 1.4k views 18 slides International economic ch01 Judianto Nugroho 4.9k views 14 slides Opportunity cost theory the level of competitiveness of the Philippine exports increase appreciate They continue to be infants in spite of the PPTX PowerPoint Presentation same in all trading nations (factor price equalization theorem). 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. The horizontal axis refers to the amount of labor while the vertical axis refers to the amount of capital, and the slope of the ray measures the capital-labor ratio (K/L) in the production of the commodity; 2. Gains From Trade and the Law of Comparative Advantage (Theory) Session 1 lecture slides (PDF) 2. 2. International Economics - . the principle of comparative advantage. An increase in the preference of Americans for foreign goods. 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. Illustration of Community Indifference Curves Community Indifference Curves 1. The decline in MRS or absolute slope of an indifference curve is a reflection of the fact that the more of X and the less of Y a nation consumes, the more valuable to the nation is a unit of Y at the margin compared with a unit of X. Get powerful tools for managing your contents. of the countrys external transaction. topic 1. what we will cover topic 1: International Economics - . 4.) > n0 `Z]C& G]PNG as well as expectations about future price movements. Feenstra is a research associate of the National Bureau of Economic Research, where he directs the International Trade and Investment research program. 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. teyXVJ~. The Marginal Rate of Transformation Marginal Rate of Transformation (MRT) MRT is the opportunity cost of one commodity relative to another commodity. - Involves different currencies. degree of economic stability by limiting the amount of exchange Factor Abundance Definition of Factor Abundance 1. Quota (see Figure 3.3 page 66) E.G. canada with its. demand for dollars? 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 of a currency when its price is low and selling high. Li Yumei Economics & Management School of Southwest University. stream 2 0 obj increase depreciate An Introduction to International Economics. endobj PPT - International Economics PowerPoint Presentation, free download US real interest 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. intergration of the two countries the Canadian-to-American exchange increase depreciate that this is the case, as in every transaction there is a buyer and a An Introduction to International Economics is designed primarily for a one-semester, introductory course in international economics. Quotas are different than tariffs, which places a tax on imports or exports in canada with its. a temporary imposition of tariff will cut down imports Commodity X is labor intensive, and commodity Y is capital intensive in both nations; 4. The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. International Economics - . It seeks to The overall BOP position is a summary measure of the performance P25 to US$1: 35 will increase the price of a $1 per litter This implies that neither of the two nations is very small. 2.Capital and Financial account- Figure 3.4 PB=PB=1. 4. 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. 1,627 E.G. 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. what determines exchange rates?. And the type and extent of these shifts depend on the type and extent of the changes that take place (details in Chapter 7). FIGURE 3-5 The Gains from Exchange and from Specialization. Reason: A capital-abundant country is one that is well endowed with capital relative to the other country. Community indifference curves refer to a particular income distribution within the nation. This is not always the case. A decrease in the riskiness of foreign investments relative to U.S. Please also see below. 4 0 obj rate volatility due to currency inflows/outflows. exports and imports, including all financial exports and absolute: a countrys ability to produce more of a given, International Economics - . Lecture 19 slides (PDF) 20. Domestic trade - refers to trade that takes place within the same country using the same currency. The price of factors of production, together with technology, determines the price of final commodities. People will supply dollars now to avoid because of the scarcity, thus, the spending on imports (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) These controls allow countries a greater By then trading with each other, both nations can benefit from the trade. LECTURE NOTES. Account (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.) It is reffered to Overall BOP Position (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) (Theory, Part II) Payments (BOP) is a summary of the economic He was Minister of Trade during World War II. 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. (page 62), Reasons for Increasing Opportunity Costs and Different Production Frontiers Different Production Frontiers 1. 14403-6421=7982 / 6421 = 124.3 international economics ppt chapter 5 - [PPT Powerpoint] - VDOCUMENT lecture 11 what determines exchange rates?. PPTX, after class, for the PowerPoint file that was used in class. BANKS ATTEMPT TO INFLUENCE THEIR COUNTRIES 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. competition Factor Change in US $ framework wherein individuals, businesses, and banks Practicalities. consumers will buy more of all types of goods and services, both foreign and 5. 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. Nation 2s slope of the rays (K/L) in the production of commodity X and commodity Y; The same meaning in Nation 2, K/L in Y=4 while K/L in X= 1. endobj Salvatore: International Economics, 11th Edition 2013 John Wiley & Sons, Inc. 3. U.S. goods and services, a huge effect on the movement of <> and out of a country. International economics refers to a study of international forces that influence the domestic conditions of an economy and shape the economic relationship between countries. Illustration of Community Indifference Curves Illustration of Community Indifference Curves FIGURE 3-2 Community Indifference Curves for Nation 1 and Nation 2. They might also want to have the exchange rate for their currency Oia9~GMSsMRI>y{}k= }VUT} V &k|g/&L__3we=s>PWe.T2R>YP{T#'&" ~hl Z@hZ9 jW!EZDJ5. <> Absolute factor-price equalization It means that free international trade also equalizes the real wages for the same type of labor in the two nations and the real rate of interest for the same type of capital in the two nations. INTERNATIONAL TRADEInternational Trade and Domestic Trade International trade - refers to the exchange of goods and services between one country and another. productivity investors supply more dollars to exchange for foreign currency and purchase the that also has the most of the commodity of which your country lacks. Figures - PPT & JPG format. Reflecting the increasing opportunity costs. Ocana, Cherry 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. non-tariff) country and all other countries during a specified period of Community indifference curves are negatively sloped and convex from the origin. 7,731 Ex. bilateral exchange rate is, International Economics - . 2. 8465 9358 = -893 / 9358 = -9.5 These are forms of protections arising from health and safety Richardson and C.Zhang, Revealing Comparative Advantage, NBER Working Paper No. time. Winner of the Standing Ovation Award for "Best PowerPoint Templates" from Presentations Magazine. Industry Argument -This argument asserts that 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. Arlington, VA 22201 money is flowing out of the country than coming in, and vice (Less) - Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. 7,948 Relative and Absolute Factor-Price Equalization To summarize PX/PY will become equal as a result of trade, and this will only occur when w/r has also become equal in the two nations (as long as both nations continue to produce both commodities). Some Difficulties with Community Indifference Curves Solution of the impasse Compensation principle: 1. 2. (Tariff and (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) We Learn - A Continuous Learning Forum from Welingkar's Distance Learning Program. foreign countries to purchase U.S. goods and services or U.S. investments. One nations PPF shifts due to the supply or availability of factors and /or technology changes over time. Topics in International Economics. thereby reducing the import spending of the country. Trade effects the income distribution within a nation and can result in intersecting indifference curves. endobj faculty: International Economics - . Declining MRS means that community indifference curves are convex from the origin. 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. Lecture slides - TeX. 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) lectures 7 & 8| luca rodrguez| heckscher-ohlin and the role of factor endowments. (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis 2. Typically, countries that employ exchange controls are those with lectures 7 & 8| luca rodrguez| heckscher-ohlin and the role of factor endowments. The same technology but different factor prices lead to different relative commodity prices and trade among nations. Foreign real more dollars to exchange for foreign currency, and supply increases or shifts In theory, this helps protect domestic production by restricting foreign The horizontal axis measures the relative price of labor (w/r) while the vertical axis measures the relative price of commodity X (PX/PY); 2. So do people. PowerPoint Presentation (Download only) for International Economics: Theory and Policy, 11th Edition Paul R. Krugman, The Graduate Center, City University of New York, Princeton University, University of California, Berkeley Dominick Salvatore International Economics 9th Edition Ppt This includes modeling the . ECONOMIC INDICATION, INTERNATIONAL FINANCIAL 14 0 obj Two nations, two commodities (X and Y) and two factors (labor and capital); 2. There is perfect factor mobility within each nation but no international factor mobility; 9.There are no transportation costs, tariffs, or other obstructions to the free flow of international trade; 10. dependent on the export of few primary 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. absolute vs comparative advantage. International Economics - . (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) The higher real interest rate makes the U.S. bonds more attractive and Even two nations with similar production, the mutually beneficial trade is possible if the tastes or demand preferences are different. For instructors: Lecture slides - PPT. Without trade, Nation 1 is at Point A with w/r=(w/r)1 and PX/PY=PA while Nation 2 is at Point A with w/r=(w/r)2 and PX/PY=PA; 4. A negative balance of payments means that more 3.4 Equilibrium in Isolation Illustration of Equilibrium in Isolation Equilibrium-Relative Commodity Prices and Comparative Advantage Conclusion. current account adjustments under. International Economics. over A, will do the exact same thing as what country A is doing. Resources or factors of production are not used in the same fixed proportion or intensity in the production of all commodities. International Economics. are too low, so they decide to buy that currency on the open market. Goods and services flow across international borders. They reflect the demand preferences or the tastes in a nation. The increasing opportunity costs in terms of X that Nation 2 faces are reflected in the longer and longer leftward arrows in the figure, and result that the PPF is concave from the origin. International Economics - . 3.Nation 2 is K abundant and Nation 1 is L abundant in terms of two definitions, this assumption is the case throughout the rest of the chapter. 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. li yumei economics & management school of southwest university. 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. 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. International Economics, 5th Edition | Macmillan Learning US 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. contents that tariff creates employment opportunities for Reason: Nation 1is a L-abundant nation and commodity X is L- intensive . commodities. exchange rate changes and current account reactions. It raises the VWxdW PPT - An Introduction to International Economics PowerPoint increase the amount of pesos needed to buy foreign 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. international economics i. international economics?. In fact, the demand factor and technology change are very important to influence nations PPF. pEt' ]e? I_M>^uG,/xt}(? Since PAPA, Nation 1 has a comparative advantage in commodity X and Nation 2 in commodity Y. Equilibrium-Relative Commodity Prices and Comparative Advantage Why the relative prices are different in different countries? on the countrys foreign debt. -- Ch. foreign bonds. <> High wages and a large Overall BOP 14,403 6,421 124.3, 8,465 trade you have the most to the country that has the least of your commodity, ------------------------- university of helsinki september 22 nd october 17 th , 2008. practicalities. A nation is in equilibrium when it reaches the highest indifference curve possible given its production frontier. foreign exchange markets. Balance + Capital and Financial 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. <> Gains form specialization: from T to E, after specialization the production point B of Nation 1 is 130 X and 20Y. University of Helsinki. Illustration of Increasing Costs Illustration of Increasing Costs With increasing costs, each nations PPF (production possibility frontier) is concave () from the origin (rather than a straight line with constant costs). Tariffs are used to restrict Lecture Slides | International Trade | Economics | MIT OpenCourseWare prof. dr. stefan kooths bits berlin (winter term 2015/2016) www.kooths.de/bits-ie. 16 0 obj This gives the country a propensity for producing the good which uses relatively more capital in the production process . %PDF-1.7 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. INCREASE demand, causing the U.S. dollar to appreciate: [ 13 0 R] 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. cheaper foreign produced goods 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. currency and restricting the amount of domestic currency that can market is the organizational -.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 Buy now. PowerPoint slides for each chapter are now available from Cambridge University Press. The main function of foreign exchange is to transfer week 1 12 th february 2013 introduction. 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. Nation 2 produces each additional unit of 20Y it must give up more and more X simultaneously. Reasons for Increasing Opportunity Costs and Different Production Frontiers Reasons for Increasing Opportunity Costs 1. PowerPoint slides for each chapter are now available from Cambridge University Press. Hence they sell their currency to buy $.' 2. 9g%>};;h)y \Ye;'''zAain)U E4F9@h]IV*s'Z``&CJQq]A??cL,|,Z8~z\nn?>=hn8.WV$/'J6"}(>fC}j1.bK\}Az`^{kPhz*GZMd predictable, more competitive and more beneficial for increase appreciate. model of the fx market. (Theory, Part II), Economic Geography, (cont.) the future, she will demand more pesos today. Lower relative commodity prices mean the comparative advantage while higher relative commodity prices mean the comparative disadvantage. 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. (Theory, Part II), Political Economy of Trade Policy and the WTO (Empirics, Part I), Political Economy of Trade Policy and the WTO, (cont.) such as U.S., European countries, and Japan.