Download Some Practical Questions

Some Practical Questions
1
Is there such a thing called complete
specialization?
Some Practical Questions
2
Is the North-South volume of trade flow
larger than that of the North-North flow?
Some Practical Questions
3
Why do governments interfere in the free
flow of goods if free international trade is
welfare improving?
Some Practical Questions
4
What is the sources of comparative
advantage (the source of differences in
opportunity cost)?
The Neo-Classical
Explanation of Trade
The Hecksher-Ohlin (H-O)
Theory of International Trade
History
Eli Heckscher (1919); 1949 ; Bertil Ohlin
(1924; 1933)
The HO ……
1
Countries no longer differ in the level of
technology, but in the amount of factors with
which they are endowed (Factor Endowment)
The HO ..…
i.e.,
Compared to its trading partner, a country is
either labor abundant or capital abundant.
Depends upon the relative capital labor ratios
The HO ..…
2
Goods differ in the amount of factors they
require to be produced (i.e., in factor
intensity)
Goods are either Capital or Labor intensive…
The HO Theory
A country should produce (and thus export)
good (s), the production of which, requires an
intensive use of the factor which is relatively
abundant in that country
The HO Theory
i.e.,
countries will have a comparative advantage in
the production of good (s) which uses the
country’s relatively abundant factor more
intensively
The HO Theory
International Trade is based on resource
availability ( Factor Abundance); Not
technological difference
Example…
Suppose we are concerned with trade
between:
Autos
U.S.A.
Textiles
MEXICO
Example…Data
USA: 50 Machines (K) & 100 Workers (L)
Mexico: 25 Machines (K) & 75 Workers (L)
Assume that Autos are K intensive and
Textile is Labor intensive….
Question….
In which country should each product be
produced?
Solution….
The HO theory says:
K intensive goods should be produced in K
abundant countries; and
L intensive goods should be produced in L
abundant countries
Question….
Determine…
Which country is K abundant?
Which country is L abundant?
Solution….
Capital Labor Ratios (K/L)
U.S.A.
50/100 =1/2 = 0.50
Mexico
25/75
Note that …
=1/3 = 0.33
Autos are K
Intensive
Textile is L
Intensive
Solution….
Is Capital
(K) abundant
Autos
….
Is LaborTextile
(L) abundant
…
Autos are K
Intensive
Textile is L
Intensive
Some Real World Data
1. Is the U.S.A. capital or labor abundant
country?
2. Which industries are K intensive?
Capital Stock per Worker in Selected Countries-1990
Country
Year-1990
Germany
Sweden
Japan
USA
Mexico
50,116
39,409
36,480
34,705
12,900
.
.
Kenya
Nigeria
907
702
Capital Labor Ratios across US Industries
Industry
K/L(1980) K/L(2000)
Chemicals
58.9
85.9
Petroleum and Coal
161.2
266.7
Electrical Machines
13.0
35.3
Food Industries
22.5
36.8
Textiles
31.9
100.1
Source: Husted and Melvin, 2004
Why should a country produce the good
which uses its relatively abundant factor?
Why would the USA
has to produce
Autos and Mexico
textiles?
The Rationale behind HO…
Differences in relative factor price ratios…
If country A ( say, the USA ) is K abundant, it must be
that the ratio of the returns to capital (i.e., rents) to that
of labor (i.e., wages)…is lower in that country than the
other.
…because capital (K) is abundant and hence cheaper, whereas
Labor (L) is scarce and hence expensive.
The Rationale behind HO…
Differences in relative factor price ratios…
• Similarly, if country B ( say, Mexico)
is Labor
abundant, it must be that the ratio of Rents to Wages
(R/W) is higher in Mexico than the U.S.A.
… because capital is scarce and hence expensive and labor
is abundant and hence cheaper.
Implications….
The basis of trade (comparative advantage) is
autarky relative factor price differentials,
which gives rise to differences in opportunity
cost
Implications….
Comparative
Advantage
Relative Factor
Abundance
Relative Factor
Price Difference
The HO and Classical Theory: Differences
1
Under HO, there is no complete specialization…
…
factors are imperfect substitutes, and firms face
increasing opportunity cost of completely
transferring resources fro one sector to the
other.
The HO and Classical Theory: Differences
2
Under HO, factor price equalization (resulting from
adjustments in excess demand and supply),
… not product price equalization
The HO and Classical Theory: Differences
3
Under HO, there are restriction on demand…tastes
and preferences are assumed to be identical,
… not under classical