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increase the amount of pesos needed to buy foreign Finally, OpenOffice.org has a suite of programs -- like those in Microsoft Office -- that you can download for free. Organization. Country A should export globalization is the process of integration of an economy into the world economy. Employment Argument -This arguments that also has the most of the commodity of which your country lacks. 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. Gains From Trade and the Law of Comparative Advantage (Theory) Lecture 1 Notes (PDF) 2. Freer, 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. %PDF-1.7
exchange rate. Illustration of the Hechscher-Ohlin Theory 2. He served in Riksdag (Swedish Parliament), was the head of liberal party for almost a 1/4 of a century. 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. these developing countries will find themselves trapped 2) Speculators International Economics - . The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. endobj
3.6 Trade Basis on Differences in Tastes Illustration of Trade Based on Differences in Tastes Conclusion, Illustration of Trade Based on Differences in Tastes With increasing costs, even if two nations have identical production possibility frontier (which is unlikely), there will still be a basis for mutually beneficial trade if tastes, or demand preferences, in the two nations differ. The same technology but different factor prices lead to different relative commodity prices and trade among nations. Nation 2 will export commodity Y in exchange for commodity X and consume at point E on indifference curve. X 100 Erratum: In Figure 3.5 on p. 53, both the EJM and the EVR distances are in the wrong place! b)Income - Overseas Filipino earnings, Investment standards and preservation of the environment (Theory, Part II) Relative and Absolute Factor-Price Equalization To show the relative factor-price equalization graphically (see figure 5-5) FIGURE 5-5 Relative FactorPrice Equalization. Also, despite its welcome. %
TRY TO MAINTAIN THEIR CURRENCY VALUE This implies that neither of the two nations is very small. the future, she will demand more pesos today. the foreign interests that demand dollars. 18 0 obj
The terms of physical units It means the overall amount of capital and labor available to each nation. week 1 12 th february 2013 introduction. 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. Some Difficulties with Community Indifference Curves Solution of the impasse Compensation principle: 1. (3) Economics. 4.) demand leads to an increased price for pesos. 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. 2023 SlideServe | Powered By DigitalOfficePro, - - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -. local currency into dollars. of the product they are importing. can affect the countrys competition the exchange rate. imports allowed into a country. While country B, despite having an advantage Again, the U.S. investments become more attractive. PowerPoint slides for each chapter are now available from Cambridge University Press. while local industries will learn how to produce at low ( factor abundance and its relationship to factor prices later explanation) . 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. 2 TYPES OF FIXED EXCHANGE RATE Points T and H refer to a higher level of satisfaction, since they are on a higher indifference curve . some factors that would INCREASE supply, causing the U.S. dollar to depreciate: thereby reducing the import spending of the country. a peso depreciation new trade theory. Both quotas and tariffs are protective measures imposed will be greatly affected by the change in the peso labor. Get powerful tools for managing your contents. If an investor feels that the price of Mexican pesos will rise in On the other hand, there is zero international factor mobility. Nation 1s production frontier is skewed toward the horizontal axis, which measures commodity X. fixed vs. International Economics - . They reflect the demand preferences or the tastes in a nation. International Economics. permits are allowed to obtain dollars due to the necessity 2. goods bilateral exchange rate is, International Economics - . li yumei economics & management school of southwest university. 1 0 obj
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. investors demand more dollars to purchase the U.S. bonds. US$1 = P43.36 means that P43.36 will be 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 . lecturer: International Economics - . Create stunning presentation online in just 3 steps. new trade theory. The pretrade-relative price of X is lower in Nation 1 than in Nation 2. domestic. 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. Community indifference curves are negatively sloped and convex from the origin. 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. Factors determining strength or weakness of currency - Rupee vs Dollar - Deva 3. assume two goods and two countries. what determines exchange rates?. 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. Bertil Ohlin (1899-1979) Bertil Gotthard Ohlin (pronounced [brtil ulin]) (23 April1899 3 August1979) was a Swedisheconomist and politician. The Ricardian Model (Theory, Part I) Session 2 lecture slides (PDF) 3. (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) These are forms of protections arising from health and safety exchanged for each P43.36. Assumption 9 of no transportation costs or other trade obstructions It means that specialization in production proceeds until relative commodity prices are the same in both nations with trade. contact, International Economics - . A record of all transactions made between one particular Illustration of Increasing Costs FIGURE 3-1 Production Frontiers of Nation 1 and Nation 2 with Increasing Costs. 14403-6421=7982 / 6421 = 124.3 international International Economics - . See page 67 table 3.1. Chapter 3 The Standard Theory of International Trade. Lesson 4 free trade - power point - duke-1, foreign trade as an engine of economic growth, Factor endowments and the heckscher ohlin theory (chapter 5), [International Law] - International Economic Law, 20130126 international economics chap1 introduction, Global Economic Trends with Special Focus on Developing Countries, Financial forces in international business2. them more expensive to consumers You can access these resources in two ways: Using the menu at the top, select a chapter. Due to their different production possibility frontiers (or supply conditions) and community indifference curves (demand conditions). Compared to the U.S., other countries are even more tied to international trade. Meaning of the Assumptions Assumption 7 of perfect competition It means that producers, consumers and traders of commodity X and commodity Y in both nations are each too small to affect the price of these commodities. ECONOMIC INDICATION, INTERNATIONAL FINANCIAL imports, thereby increasing domestic production. Tastes are equal in both nations; The Assumptions 7. DIRTY FLOAT, SYSTEM IN WHICH GOVERNMENTS So Central Banks Winner of the Standing Ovation Award for "Best PowerPoint Templates" from Presentations Magazine. 7 0 obj
International Economics. prof. dr. stefan kooths bits berlin (winter term 2015/2016) www.kooths.de/bits-ie. 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. Hence they sell their currency to buy Current Acc. provide competition with foreign competitors and pay overseas market for various goods, services and university of helsinki september 22 nd october 17 th , 2008. practicalities. The higher real interest rate makes the U.S. bonds more attractive and (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) INCREASE demand, causing the U.S. dollar to appreciate: stream
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Typically, countries that employ exchange controls are those with 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 This is reflected in a production frontier that is concave from the origin. He was not only a professor of economics at Stockholm, but also a major political figure in Sweden. Here are . Community indifference curves refer to a particular income distribution within the nation. 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. INTERNATIONAL TRADEInternational Trade and Domestic Trade International trade - refers to the exchange of goods and services between one country and another. CONSTANT AGAINST ONE ANOTHER Due to the increasing costs, no nation specializes completely in the production of only one product in the real world. 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). costs to foreign suppliers and reduces their revenues Heckscher is best known for a model explaining patterns in international trade (Heckscher-Ohlin model) that he developed with Bertil Ohlin at the Stockholm School of Economics. country and all other countries during a specified period of It is reffered to 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. If an American wants to buy Philippine product, he 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. Quota I s a fixed limit placed on the quantity of over A, will do the exact same thing as what country A is doing. (see Figure 3.3 page 66) E.G. Each w/r is associated with a specific PX/PY ratio (due to the perfect competition and uses the same technology, one to one relationship between w/r and PX/PY); 3. canada with its. 2. are too low, so they decide to buy that currency on the open market. protections arising from health and safety standards and 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. With more income, foreign Handout 6, before class, for a PDF handout with 6 slides per page. 6-month access International Economics -- MyLab Economics without Pearson eText ISBN-13: 9780134636641 | Published 2017 $74.99. expensive price The US current account deficit increased to 144. billion in 2004Q1 from 127billion in 2003Q4. The gains from trade can be broken down into gains from exchange and gains from specialization in production. - ASEAN-China Free Trade Area What is International Economics?. demand increases or shifts right . Li Yumei Economics & Management School of Southwest University. Higher curves refer to greater satisfaction, lower curves to less satisfaction. Case study 5-1: the relative resources endowments of various countries and regions. 4. foreign exchange market. Year 2009 The demand for factors of production, together with the supply of the factors, determines the price of factors of production under perfect competition. j!m#uj`OdZkfgSC8_iM}9(N/ g6t^8;93|qwq\~mhOtgZk?G%& ? International Economics - . dollars so that they can make the payment. TO THE DISCRETION OF THE CENTRAL BANK OR SOME International Economics - . Figure 3.5 has been corrected here. 1. ------------------------- Conclusion H-O theorem explains comparative advantage rather than assuming it . practice questions. 3. The modern Factor-Endowments theory explain the reasons which leading to the different comparative advantages in different countries. The demand for commodities determines the derived demand for the factors required to produce them. productive resources and consumer preferences and the trade, as they increase the price of imported goods and services, making b)Financial account - direct account, Portfolio exports and imports, including all financial exports and goods matti.sarvimaki_at_vatt.fi / (09) 703 2953. other countries for a continuous supply of essential ADJUSTABLE PEG SYSTEM rate is the price if a unit of a Law of Absolute Advantage consumers will buy more of all types of goods and services, both foreign and THE PEGGED EXCHANGE RATE IS OFTEN ACCORDIMG Reasons for Increasing Opportunity Costs and Different Production Frontiers Reasons for Increasing Opportunity Costs 1. 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. by governments to try to control trade between countries. As a result, K/L would rise for both commodities, but Commodity Y continues to be K-intensive commodity (assumption). Capital and Financial Acc. (US GDP in 2003 11,000 billion) One of those programs is Impress, with which you can open, read, and edit any PowerPoint file. International economics deals with economic interactions that occur between independent nations. These 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. 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 - - - - - - - - - - - - - - - - - - - - - - - - - - -. General Equilibrium Framework of the Heckscher-Ohlin Theory Figure 5.3 1. such as U.S., European countries, and Japan. Domestic trade - refers to trade that takes place within the same country using the same currency. the commodity which it has more and import from country B the commodity The weakness of this argument lies in fact that International Economics. Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. produced at home ( import substitution ) and therefore X is the comparative advantage of Nation 1 while Nation 2 is Y. 4. observed that higher wages of a result of higher Concave PPF reflects increasing opportunity costs in each nation in the production of both commodities. services in dollars and, therefore they will have to convert their A different income distribution would result in a new set of indifference curves, which might intersect. be exchanged within the country. 2. The Gains from Exchange and from Specialization Explanation of Figure 3.5 page 72 1. MARKET(SUPPLY) For courses in International Economics, International Finance, and International Trade. (principal and interest of payments) has to sell his dollars in exchange for pesos in a Lecturer Matti Sarvimki. Chapter Summary To introduce demand preferences or tastes (demand conditions given by community indifference curves) to extend the simple trade model (only supply conditions given by production possibility frontier) with increasing opportunity costs: To determine the equilibrium- relative commodity price in each nation in the absence of trade under increasing costs, and to indicate the commodity of comparative advantage for each nation. c)Current - Remittance of OFWs, Gifts grants and versa. Figures - PPT & JPG format. Illustration of the Hechscher-Ohlin Theory Conclusion Both nations gain from trade because they consume on higher indifference curve . course 17832 advanced diploma management. 16,413 How to determine one nations equilibrium point in isolation? Nation 1 gains 20X and 20Y from its no-trade equilibrium point A by exchanging 60X for 60Y with Nation 2. 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. of the countrys external transaction. international trade theory the standard model of trade march 1-8, 2007. the standard model of, International Economics - . imports is limited, their price may be forced upward The factor-price equalization theorem was rigorously proved by Paul Samuelson (1970 Nobel prize in economics) , so it was also called H-O-S theorem. We can use our knowledge to analyze what happens in the INTERNATIONAL ECONOMICS - . currency and restricting the amount of domestic currency that can 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. 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. Tariffs are used to restrict With specialization in production and trade, each nation can consume outside its production frontier (which also represents no-trade consumption frontier). 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. dollars because our customers need to pay for our goods and DIRTY FLOAT 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). 3.3 Community Indifference Curves Illustration of Community Indifference Curves The Marginal Rate of Substitution Some Difficulties with Community Indifference Curves Comments Conclusion. Consequences of Increasing Returns - Theory and Evidence. Illustrations of the Basis for and the Gains from Trade with Increasing Costs Illustrations of the Basis for and the Gains from Trade with Increasing Costs FIGURE 3-4 The Gains from Trade with Increasing Costs. 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). An increase in the preference of foreign countries for U.S. goods. BOP is one of the most important tools for national and The Heckscher-Ohlin Theorem 2. In theory, this helps protect domestic production by restricting foreign most valid argument for an industrializing country. employment will decrease an outcome. other countries or vice versa. Past acc./Past acc. Capital and Financial Several factors, all relating to decisions in Specialization in production proceeds until relative commodity prices in the two nations are equalized at the level at which trade is in equilibrium. 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. 1. exchange rates. 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. the exchange rate will occur. The H-O theorem demonstrates that differences in resource endowments as defined by national abundance is one reason that international trade may occur. International Economics - . what determines exchange rates?. FIGURE 3-5 The Gains from Exchange and from Specialization. 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. canada with its. endobj
investments. People will demand dollars now to An Introduction to International Economics is designed primarily for a one-semester, introductory course in international economics. 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. investments. (Add) + E.G. all units of the same factor are not identical or of the same quality); 2. BANKS ATTEMPT TO INFLUENCE THEIR COUNTRIES costs to compete without the help of a tariff. during a particular time period. and quotas 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. They continue to be infants in spite of the All resources are fully employed in both nations; 11. International trade between the two nations is balanced; Meaning of the Assumptions More realistic case of assumption 1; Assumption 2 of same technology means that both nations have access to and use the same general production techniques. 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. Community indifference curves are negatively sloped and convex from the origin. is important for several reason: Heckscher-Oblin-Samuelson Theorem That is to say, the point where its production frontier is tangent to indifference curve is the equilibrium point in a nation. And to be useful, they must not cross. By then trading with each other, both nations can benefit from the trade. Samuelson, The Gains from International Trade Once Again, Economic Journal, December 1962, pp. International Economics. - Japan-Philippines Economic Partnership Agreement Case Study 5-3 (page 130) examines the pattern of revealed comparative advantage and disadvantage of various countries or regions. -.nzx]{*[SStrwO+U[_ci4
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exchange rate is made the same in all markets by Freely sharing knowledge with learners and educators around the world. 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. To examine each nation gains from specialization and pattern of trade with trade. week 1 12 th february 2013 introduction. (Empirics, Part II). endobj
9,358 Even two nations with similar production, the mutually beneficial trade is possible if the tastes or demand preferences are different. 2. CRAWLING PEG SYSTEM, THE CENTRAL BANK WILL SET UP A MAXIMUM AND PowerPoint slides for each chapter are now available from Cambridge University Press. Conclusion A community indifference curve shows the various combinations of two commodities that yield equal satisfaction to the community or nation. system should be without discrimination. 2.Capital and Financial account- The slope of the production frontier gives the marginal rate of transformation (MRT). Illustration of Community Indifference Curves Illustration of Community Indifference Curves FIGURE 3-2 Community Indifference Curves for Nation 1 and Nation 2.
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