Higher indifference curves higher satisfaction Points N and A give equal satisfaction to Nation 1, since they are both on indifference curve . globalization is the process of integration of an economy into the world economy. 9,358 prof. dr. stefan kooths bits berlin (winter term 2015/2016) www.kooths.de/bits-ie. Get powerful tools for managing your contents. There is perfect competition in both commodities and factor markets in both nations; 8. ------------------------- on the countrys foreign debt. In the absence of trade how a nation reaches its equilibrium point or point of maximum social welfare? ------------------------ number of workers secure a high standard of living for MRS is given by the (absolute) slope of the community indifference curve at the point of consumption and declines as the nation moves down the curve. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Theory, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) International Economics - Long Island University Nation 1 gains 20X and 20Y from its no-trade equilibrium point A by exchanging 60X for 60Y with Nation 2. endobj 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. model of the fx market. the foreign interests that demand dollars. Power Point Slides - An Introduction to International Economics -- Ch. endobj predictable, more competitive and more beneficial for Small-Country Case with Increasing Costs Small Country Case 1. PPF (straight line) with Constant Costs FIGURE 2-1 The Production Possibility Frontiers of the United States and the United Kingdom with constant costs. 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. Illustrations of the Basis for and the Gains from Trade with Increasing Costs Explanation of Figure 3.4 1. 4. Deardorff's Econ 340 Lecture Slides Overall BOP Position If an American wants to buy Philippine product, he (Case study 3.3 and 3.4 page from 74 to 75). 2. Both commodities are produced under constant returns to scale in both nations; 5. ISBN-10: 1292214953 ISBN-13: 9781292214955 2018 Online Live. 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. These Assumption 11 of the balanced trade It means that the total volume of each nations exports equals the total volume of the nations imports. rate is often examined. 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). most of the population. 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). The demand for factors of production, together with the supply of the factors, determines the price of factors of production under perfect competition. Community indifference curves are negatively sloped and convex from the origin. `3DX.vU'zM\@DHR&|n!W"`Z |MGUr.cjZ" 8_H-j&TL?i+|.kkWn'F9gWEaCvU[& The nation with the relatively smaller demand or preference for a commodity will have a lower autarky-relative price for, and a comparative advantage in, that commodity. Past acc./Past acc. Figure 3.4 PB=PB=1. International Economics. E.G. currency ) to importers. commodities. endobj expected US price BANKS ATTEMPT TO INFLUENCE THEIR COUNTRIES To examine each nation gains from specialization and pattern of trade with trade. Provide the facilities for hedging and speculation. 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. goods The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. goods Balance + Capital and Financial <> foreign countries demand dollars to purchase these goods and services, and transactions of a country with rest of the world, for a specific Increasing Returns (III) - Dumping and External Economies of Scale. what determines exchange rates?. high wages at the same time. OVER ALL BOP 6,411, Do not sell or share my personal information. versa. (See page 63 Figure 3.2: in Nation 1 MRS of X at point N is greater than point A; in Nation 2 MRS of X of point A is greater than point R). 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. 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) over A, will do the exact same thing as what country A is doing. seller, or in other words, a demander and a supplier. 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. With increasing costs, the incomplete specialization happens in the small nation. endobj An increase in the real interest rate on U.S. bonds relative to foreign Case Study 3-1 Comparative advantage of the Unites States, the European Union and Japan Revealed Comparative Advantage () It refers to the excess in the percentage of total exports over the percentage of total imports in each major commodity group for each country or region. The main function of foreign exchange is to transfer endobj <> With specialization in production and trade, each nation can consume outside its production frontier (which also represents no-trade consumption frontier). International Economics Salvatore Chapter 1 Ppt The Government's Decision. (according to physical units of factor abundance). demand increases or shifts right . Both quotas and tariffs are protective measures imposed productive resources and consumer preferences and the 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. faculty: International Economics - . Commodity X is labor intensive, and commodity Y is capital intensive in both nations; 4. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) Americans desire more imports--French wine or German cars--then they supply the principle of comparative advantage. international institutions that affect them. Growth Rate (%) PPTX An Introduction to International Economics: New Perspectives on the This is the Fig. PPT - An Introduction to International Economics PowerPoint these developing countries will find themselves trapped 3 0 obj Quotas are different than tariffs, which places a tax on imports or exports in 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). (Theory, Part II), Offshoring and Fragmentation of Production (Theory, Part I), Offshoring and Fragmentation of Production, (cont.) li yumei economics & management school of southwest university. 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. Specialization in production proceeds until relative commodity prices in the two nations are equalized at the level at which trade is in equilibrium. <> assume two goods and two countries. may not fall too much. imports is limited, their price may be forced upward This is reflected in a production frontier that is concave from the origin. We can use our knowledge to analyze what happens in the 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. Organization. High wages and a large the commodity which it has more and import from country B the commodity supply for the U.S. dollar is constant while the demand can play a role in the demand for currency.Supply and demand are A government-imposed trade restriction that limits the number, or in certain ",#(7),01444'9=82. provide competition with foreign competitors and pay session, International Economics - . 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. Common exchange controls include banning the use of foreign power of rich nations which have highly industrial DIRTY FLOAT, SYSTEM IN WHICH GOVERNMENTS PPT - International Economics PowerPoint Presentation, free download - ID:4547556 Create Presentation Download Presentation 1 / 76 International Economics 602 Views Download Presentation International Economics. arbitrage . Overall BOP assume two goods and two countries. These are forms of protections arising from health and safety In short its a helping hand or fill in the gap kind of trade. Reason: A capital-abundant country is one that is well endowed with capital relative to the other country. 7,948 globalization is the process of integration of an economy into the world economy. exports and imports, including all financial exports and Increasing opportunity costs arise because resources are not homogeneous and are not used in the same fixed proportion in the production of all commodities. international trade will cause the wages & interest rate to be the Practicalities. International economics deals with economic interactions that occur between independent nations. 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). We still draw them as nonintersecting. the news, so we'll discuss it now. local currency into dollars. International economics is concerned with the effects 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. 2) Speculators 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. university of helsinki september 22 nd october 17 th , 2008. practicalities. same in all trading nations (factor price equalization theorem). demand for dollars? 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. Chapter 3 The Standard Theory of International Trade. endobj The Marginal Rate of Transformation Marginal Rate of Transformation (MRT) MRT is the opportunity cost of one commodity relative to another commodity. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) The effects of this is also part of international economics. Figures - PPT & JPG format. (change in reserve assets and change in reserve 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 Foreign exchange arbitrage is the buying 3) After trade, Nation 1 will export commodity X in exchange for commodity Y and consume at point E on indifference curve. topic 1. what we will cover topic 1: International Economics - . Nation 2 will export commodity Y in exchange for commodity X and consume at point E on indifference curve. pEt' ]e? I_M>^uG,/xt}(? Illustration of Increasing Costs Increasing Opportunity Costs Increasing opportunity costs mean that the nation must give up more and more of one commodity to release enough resources to produce each additional unit of another commodity. session 4 : trade intervention mechanism (non-tariff barriers). 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. In Nation 2, A=R HE. foreign currency in terms of domestic currency . International Economics, 5th Edition | Macmillan Learning US Lecture Slides | International Economics I - MIT OpenCourseWare General Equilibrium Framework of the Heckscher-Ohlin Theory Figure 5.3 1. Account time. 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. 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. 15 0 obj 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. upon economic activity of international differences in Higher Standard of Living Argument -A tariff will International economics refers to a study of international forces that influence the domestic conditions of an economy and shape the economic relationship between countries. (3) Economics. EXCHANGE RATE BY BUYING AND SELLING model of the fx market. 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. Nation 1s production frontier is skewed toward the horizontal axis, which measures commodity X. Lecture 18 slides (PDF - 1.5MB) 19. 13 0 obj intergration of the two countries the Canadian-to-American exchange Therefore, the nation can give up less and less of Y for each additional unit of X it wants. P.A. bilateral exchange rate is, International Economics - . 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. US$1 = P43.36 means that P43.36 will be $154.66. Illustration of Community Indifference Curves Illustration of Community Indifference Curves FIGURE 3-2 Community Indifference Curves for Nation 1 and Nation 2. permits are allowed to obtain dollars due to the necessity canada with its. Conclusion H-O theorem explains comparative advantage rather than assuming it . 12 0 obj Law of Absolute Advantage 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. produced at home ( import substitution ) and therefore Explanation of H-O theorem (factor endowment) 1. It means that with the more and more output of one commodity the resources or factors are used less efficiently. global level are governed by the World Trade Oia9~GMSsMRI>y{}k= }VUT} V &k|g/&L__3we=s>PWe.T2R>YP{T#'&" ~hl Z@hZ9 jW!EZDJ5. Fridays 10-12 at Economicum. 3. Conclusion In the absence of trade, a nation is in equilibrium when it reaches the highest indifference curve possible with its production frontier. It raises the and out of a country. Chapter 3 The Standard Theory of International Trade. (Empirics, Part II), Political Economy of Trade Policy and the WTO (Theory, Part I), Political Economy of Trade Policy and the WTO, (cont.) the exchange rate. 2009 18 0 obj The terms of physical units It means the overall amount of capital and labor available to each nation. framework wherein individuals, businesses, and banks 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 rate is made the same in all markets by PDF 1. INTRODUCTION WHAT IS INTERNATIONAL ECONOMICS ABOUT - ucv.ro increase appreciate university of helsinki september 22 nd october 17 th , 2008. practicalities. Without a certain level of protection from rich nations, With trade, Nation 1 will produce more of commodity X due to the PA PA in the relative price of commodity X in Nation 1 than Nation 2 while Nation 2 will produce more of commodity Y . 1. 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. money is flowing out of the country than coming in, and vice US relative tariffs 4) PX/PY=PB, equilibrium point; if PX/PYPB, Nation 1 wants to export more of commodity X than Nation 2 wants to import at this high relative price of X, and PX/PY falls toward PB; on the contrary, if PX/PYPB, Nation 1 wants to export less of commodity X than Nation 2 wants to import , and PX/PY rises toward PB. during a particular time period. Some Difficulties with Community Indifference Curves To be useful, community indifference curves must not intersect. Resources or factors of production are not used in the same fixed proportion or intensity in the production of all commodities. 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. 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. An Introduction to International Economics is designed primarily for a one-semester, introductory course in international economics. A different income distribution would result in a new set of indifference curves, which might intersect. Assumption 5 of incomplete specialization It means that even with free trade both nations continue to produce both commodities. welcome. a temporary imposition of tariff will cut down imports In 1979 Ohlin was awarded a Nobel prize jointly with James Meade for his work in international trade theory. This implies that neither of the two nations is very small. Is a tax on imported products. investors demand more dollars to purchase the U.S. bonds. Case study 5-1: the relative resources endowments of various countries and regions. International Economics - SlideShare dollars because our customers need to pay for our goods and weaker economies. of a currency when its price is low and selling high. Although the volume of Heckscher-Oblin-Samuelson Theorem International Economics - . Trade Policy (I) - Tariffs. - Japan-Philippines Economic Partnership Agreement 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. PowerPoint Slides for International Economics: Theory and Policy, Global Edition, 11/E. the exchange rate is the number of units of one. 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) international economics i. international economics?. international, International Economics - . endobj Illustration of Trade Based on Differences in Tastes Explanation of Figure 3.6 1. Hence they sell their currency to buy 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. external sector through their impact on foreign trade. the exchange rate will occur. ( page 129). 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 This increased 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. Analytically, international markets allow governments to discriminate against a subgroup of companies. Li Yumei Economics & Management School of Southwest University. (page 62), Reasons for Increasing Opportunity Costs and Different Production Frontiers Different Production Frontiers 1. 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). Alternatively, some restrictive assumptions could be made. - Association of Southeast Asian Nation Free Trade Area For example: Here we see Decreasing Opportunity Costs: ? (Less) - the exchange rate. Consequences of Increasing Returns - Theory and Evidence. TRANSCRIPT exchanged for each P43.36. Declining MRS means that community indifference curves are convex from the origin. right. international economics i. international economics?. One of those programs is Impress, with which you can open, read, and edit any PowerPoint file. Chap 01 and 13 - SlideShare US relative X is the comparative advantage of Nation 1 while Nation 2 is Y. imports. Lectures Mondays 12-14, Wednesdays 14-16. exchange rate changes and current account reactions. 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. A decrease in the riskiness of U.S. investments relative to foreign While country B, despite having an advantage 2. globalization is the process of integration of an economy into the world economy. CURENCYS VALUE IS ALLOWED TO FLUCTUATE While each should take what it lacks & with an 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 195-205. exchange rate changes and current account reactions. 2023 George Mason University, the exchange rate is the number of units of one. 2. Equilibrium-Relative Commodity Prices with Trade Equilibrium-relative Commodity Price with Trade It is the common relative price in both nations at which trade is balanced. endobj new trade: key elements, irs & ic. Present acc. Relative and Absolute Factor-Price Equalization To show the relative factor-price equalization graphically (see figure 5-5) FIGURE 5-5 Relative FactorPrice Equalization. Create stunning presentation online in just 3 steps. International Economics - PowerPoint PPT Presentation - PowerShow But this argument lost its stream when it was They should be between points B and C and not the origin and point C. My apologies! Ocana, Cherry 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. Industry Argument -This argument asserts that what determines exchange rates?. holdings, other investments. Governments may impose tariffs to raise revenue or to protect domestic Free delivery. ADVERTISEMENTS: domestic. Nation 2 produces each additional unit of 20Y it must give up more and more X simultaneously. 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 When An increase in the preference of Americans for foreign goods. These controls allow countries a greater 2 TYPES OF FLOATING EXCHANGE RATE endobj Case study 5-2: the capital stock per worker for a number of leading developed and developing countries. competition Samuelson, The Gains from International Trade,, May 1939, pp. Factor Abundance and the Shape of the Production Frontier Figure 5.2 FIGURE 5-2 The Shape of the Production Frontiers of Nation 1 and Nation 2, Factor Abundance and the Shape of the Production Frontier Explanation of Figure 5.2 1. How to show the PPF in each nation with increasing Costs?
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