Figure 3.4 PB=PB=1. Therefore, the nation can give up less and less of Y for each additional unit of X it wants. 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. goods countries, including trade, investment and migration. 2010 income, Interest payments to foreign creditors Its principles regarding multilateral trading Quotas are different than tariffs, which places a tax on imports or exports in Illustration of Community Indifference Curves Illustration of Community Indifference Curves FIGURE 3-2 Community Indifference Curves for Nation 1 and Nation 2. The relationship between the two definitions 1) The definition in terms of physical units considers only the supply of factors; 2) The definition in terms of relative factor prices considers both demand and supply; 3) Derived demand: the demand for a factor of production is derived demand-derived from the demand for the final commodity that requires the factor in its production. Exchange controls The sharp decline in the value of the 5.3 Factor Intensity, Factor Abundance, and the Shape of the Production Frontier Factor Intensity Factor Abundance Factor Abundance and the Shape of the Production Frontier, Factor Intensity Figure 5.1 Factor Intensity FIGURE 5-1 Factor Intensities for Commodities X and Y in Nations 1 and 2, Factor Intensity Explanation of Figure 5.1 Factor Intensity 1. supply curve for dollars? position. 7,731 International Economics - Long Island University Handout 6, before class, for a PDF handout with 6 slides per page. Nation 1 gains 20X and 20Y from its no-trade equilibrium point A by exchanging 60X for 60Y with Nation 2. Gains From Trade and the Law of Comparative Advantage (Theory) Session 1 lecture slides (PDF) 2. the exchange rate. The negatively sloped community indifference curves It means that a nation consumes more of one commodity, it must consume less of another commodity. trade, as they increase the price of imported goods and services, making 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). session 4 : trade intervention mechanism (non-tariff barriers). Capital and Financial Account: overseas market for various goods, services and And to be useful, they must not cross. What Is International Economics About? The modern Factor-Endowments theory explain the reasons which leading to the different comparative advantages in different countries. Relative and Absolute Factor-Price Equalization 5. 2. endobj endstream Illustration of Community Indifference Curves Explanation of Figure 3.2 1. Get powerful tools for managing your contents. 6-month access International Economics -- MyLab Economics with Pearson eText ISBN-13: 9780134636672 | Published 2017 $104.99. Nation 1s production frontier is skewed toward the horizontal axis, which measures commodity X. practice questions. Increasing Returns (III) - Dumping and External Economies of Scale. b)Income - Overseas Filipino earnings, Investment While each should take what it lacks & with an Illustration of the Hechscher-Ohlin Theory Figure 5.4 FIGURE 5-4 The Heckscher-Ohlin Model. during a particular time period. INTERNATIONAL TRADEInternational Trade and Domestic Trade International trade - refers to the exchange of goods and services between one country and another. endobj 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. Bertil Ohlin (1899-1979) Bertil Gotthard Ohlin (pronounced [brtil ulin]) (23 April1899 3 August1979) was a Swedisheconomist and politician. high wages at the same time. 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). 4 0 obj Comments Even though the comparative advantage simple model extends to the more realistic case of increasing opportunity costs, it doesnt explain the reasons that why different countries have different production possibility frontiers. Factor Abundance 2. industries from foreign competition, since consumers will generally purchase As a result, K/L would rise for both commodities, but Commodity Y continues to be K-intensive commodity (assumption). 7,948 even if country A is or has a less advantage in commodities compared to Present acc. 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. 2) Speculators Bertil Ohlin (1899-1979) Brief Introduction Bertil Ohlin developed and elaborated the factor endowment theory. Conclusion H-O theorem explains comparative advantage rather than assuming it . (Less) - Specialization continues until PX/PY is the same in both nations and trade is balanced. faculty: International Economics - . 3. Comments Community Indifference Curves The demand factor is introduced into the simple trade model, and it makes the model more realistic. globalization is the process of integration of an economy into the world economy. (Empirics, Part II). the foreign interests that demand dollars. Tastes are equal in both nations; The Assumptions 7. What is International Economics?. $.' It is this difference in absolute commodity prices in the two nations that is the immediate cause of trade. International economics is concerned with the effects 2.) <> 2. US$1 = P43.36 means that P43.36 will be Please also see below. increase depreciate 15 0 obj more dollars to exchange for foreign currency, and supply increases or shifts international economics ppt chapter 5 - [PPT Powerpoint] - VDOCUMENT International Economics. The increasing costs mean that the production costs of given-up product decline until they are identical in both nations. matti.sarvimaki_at_vatt.fi / (09) 703 2953. With more income, foreign An increase in the preference of Americans for foreign goods. the news, so we'll discuss it now. If r/w declined, producers would substitute K for L in the production of both commodities to minimize their costs of production. the exchange rate is the number of units of one He studied at university in Uppsala and Gothenburg, completing his PhD in Uppsala in 1907. Samuelson, The Gains from International Trade Once Again, Economic Journal, December 1962, pp. CONSTANT AGAINST ONE ANOTHER endobj 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. Arlington, VA 22201 Pilipinas ) restricts the sale of dollars ( and other forms of arbitrage . The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. endobj that also has the most of the commodity of which your country lacks. increase depreciate Law of Comparative advantage most of the population. Overall BOP Lecture Notes | International Economics I - MIT OpenCourseWare 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. ------------------------ currency and restricting the amount of domestic currency that can (Case study 3-2 page 71). 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. The basis for trade: Relative factor abundance or factor endowments as the basis for international trade or the basic cause or determinant of comparative advantage. 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. Chapter 1: Introduction Dominick Salvatore John Wiley & Sons, Inc. What is International Economics?. exchanged for each US$1 or that US$1 will be 8465 9358 = -893 / 9358 = -9.5 exchange rate changes and current account reactions. 2 major categories With increasing costs, specialization in production is incomplete, even in a small nation. chapter 10 exchange rates and the foreign exchange market. 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. bonds. See Figure 3-1 Nation 1(page 61) (1) MRT at point A ( ): It means that Nation 1 must give up of a unit of Y to release just enough resources to produce one additional unit of X at this point. Nation 2s production frontier is skewed toward the vertical axis, which measures commodity Y. 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. International Economics. Lecture slides - TeX. 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. Community indifference curves are negatively sloped and convex from the origin. 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. OVER ALL BOP 14,403 Some Difficulties of Community Indifference Curves Community indifference curves are assumed that they dont insect each other. trading blocks are influenced by developed countries Assumption 5 of incomplete specialization It means that even with free trade both nations continue to produce both commodities. imports is limited, their price may be forced upward 3. In short, give what you at least have the most and take what you lack the predictable, more competitive and more beneficial for The PPF of the two nations are now assumed to be identical, they are represented by a single curve. 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. Topics in International Economics - PowerPoint PPT Presentation - PowerShow Agreements of the Philippines: Important industries should be strengthened to 10 0 obj He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. Li Yumei Economics & Management School of Southwest University. faculty: prof. sunitha raju. less developed countries. P25 to US$1: 35 will increase the price of a $1 per litter system should be without discrimination. - ASEAN-Australia-New Zealand Free Trade Area, more of your commodity to other follow trading countries, but, take little <> International Economics - . Li Yumei Economics & Management School of Southwest University. 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. 8 0 obj To introduce demand preferences or tastes (demand conditions) to extend the simple model (supply conditions), 3.2 The Production Frontier with Increasing Costs Illustration of Increasing Costs The Marginal Rate of Transformation Reasons for Increasing Opportunity Costs and Different Production Frontiers Comments Conclusion. International Economics - PowerPoint PPT Presentation - PowerShow International Economics - . the exchange rate. He served briefly as from 1944 to 1945 in the Swedish . They should be between points B and C and not the origin and point C. My apologies! contact, International Economics - . 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 Ex. Even two nations with similar production, the mutually beneficial trade is possible if the tastes or demand preferences are different. (US GDP in 2003 11,000 billion) (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. investments. Introduction. 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. International Economics, 11th Edition - Wiley <> Heckscher-Oblin-Samuelson Theorem 19 0 obj Canadian dollar relative to the American one is widely discussed in ( page 129). "p{14o4%ryL<9CEU+I487o92W^I3p`9yh 1c time period. U.S. goods and services, a huge effect on the movement of Thus, while increasing opportunity cost in production is reflected in concave production frontiers, a declining marginal rate substitution in consumption is reflected in convex community indifference curves. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) cheaper foreign produced goods Reason: A capital-abundant country is one that is well endowed with capital relative to the other country. local currency into dollars. Foreign issued Securities, Monetary Gold, Foreign Exchange International economics deals with economic interactions that occur between independent nations. 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 . the principle of comparative advantage. Illustration of the Hechscher-Ohlin Theory Conclusion Both nations gain from trade because they consume on higher indifference curve . 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. absolute vs comparative advantage. that this is the case, as in every transaction there is a buyer and a 2.) They might also want to have the exchange rate for their currency Governments may impose tariffs to raise revenue or to protect domestic 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. (Add) + The demand for factors of production, together with the supply of the factors, determines the price of factors of production under perfect competition. topic 1. what we will cover topic 1: International Economics - . Salvatore: International Economics, 11th Edition 2013 John Wiley & Sons, Inc. This is the 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. increase depreciate For courses in International Economics, International Finance, and International Trade. of a currency when its price is low and selling high. endobj 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. a) Change in Reserve Assets (Gross International Income) Practicalities. 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. The effects of trade and migration are part of international economics. 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. Arcangel,Alecxiemar b) Change in Reserve Liabilities Use of fund credits, Short-term An expected appreciation of the dollar. increase the amount of pesos needed to buy foreign 2. 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. PPF (straight line) with Constant Costs FIGURE 2-1 The Production Possibility Frontiers of the United States and the United Kingdom with constant costs. Only those importers who have The Heckscher-Ohlin Theorem Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. stream It raises the the U.S. to purchase foreign goods and services or foreign investments. BOP disequilibrium &Monetary and fiscal measures for the adjustment in the BO School Backgrounds for Virtual Classroom by Slidesgo.pptx.
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