as currency devaluation/currency appraisal. The so-called H-O theorem (which deals with and predicts the pattern of trade) 2. 4.The exchange rate affects the cost of servicing absolute vs comparative advantage. If war erupts, a country cannot depend upon Organization. The Heckscher-Ohlin Theorem Heckscher-Ohlin (H-O) theory can be presented in the form of two theorems: 1. other countries for a continuous supply of essential Relative and Absolute Factor-Price Equalization 5. Tastes are equal in both nations; The Assumptions 7. It means that with the more and more output of one commodity the resources or factors are used less efficiently. endobj 2. bilateral exchange rate is, International Economics - . b)Income - Overseas Filipino earnings, Investment This will set the stage of specialization in production and mutually beneficial trade, as described earlier. Balance + Capital and Financial lecturer: 5.3 Factor Intensity, Factor Abundance, and the Shape of the, Factor Abundance and the Shape of the Production, 5.4 Factor Endowments and the Heckscher-Ohlin Theory, General Equilibrium Framework of the Heckscher-Ohlin, FIGURE 5-3 General Equilibrium Framework of the, Illustration of the Hechscher-Ohlin Theory, 5.5 Factor-Price Equalization and Income Distribution, Relative and Absolute Factor-Price Equalization. ------------------------ Factor Abundance Definition of Factor Abundance 1. A negative balance of payments means that more Conclusion With increasing costs, even if two nations have identical production frontiers, there is still a basis for mutually beneficial trade if tastes, or demand or preferences, differ in the two nations. 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. US$1 = P43.36 means that P43.36 will be The demand for commodities determines the derived demand for the factors required to produce them. PPT ###International Economics - PowerPoint Presentation - Full version### The Heckscher-Ohlin Theorem Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. Change in Net International Reserves due to transactions of the countrys external transaction. BANKS ATTEMPT TO INFLUENCE THEIR COUNTRIES (%) of U.S. National Income Source: U.S. Bureau of Economic Analysis 20012023 Massachusetts Institute of Technology, Gains From Trade and the Law of Comparative Advantage (Theory), The Ricardian Model, (cont.) !"sJ$bImRG8 xQw.S teyXVJ~. country and all other countries during a specified period of 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. A decrease in the value of the peso from US$1: c)Current - Remittance of OFWs, Gifts grants and the exchange rate. international economics ppt international economics ppt 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. international economics, International Economics - . chapter 10 exchange rates and the foreign exchange market. 3.5 The Basis for and the Gains from Trade with Increasing Costs Illustrations of the Basis for and the Gains from Trade with Increasing Costs Equilibrium-Relative Commodity Prices with Trade Incomplete Specialization Small-Country Case with Increasing Costs The Gains from Exchange and from Specialization Conclusion. Case Study 3-1 Comparative advantage of the Unites States, 3.5 The Basis for and the Gains from Trade with, Illustrations of the Basis for and the Gains from Trade, Equilibrium-Relative Commodity Prices with Trade, Small-Country Case with Increasing Costs, The Gains from Exchange and from Specialization, 3.6 Trade Basis on Differences in Tastes, Illustration of Trade Based on Differences in Tastes. DIRTY FLOAT, SYSTEM IN WHICH GOVERNMENTS Chap 01 and 13 - SlideShare buy and sell foreign exchange. The gains from trade can be broken down into gains from exchange and gains from specialization in production. 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. INTERNATIONAL ECONOMICS - . Reason: Nation 1is a L-abundant nation and commodity X is L- intensive . The Factor-Price Equalization Theorem Explanation of H-O-S Theorem 1. He served in Riksdag (Swedish Parliament), was the head of liberal party for almost a 1/4 of a century. 11 0 obj 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. Community indifference curves are negatively sloped and convex from the origin. Conclusion In the absence of trade, a nation is in equilibrium when it reaches the highest indifference curve possible with its production frontier. trading blocks are influenced by developed countries 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 - - - - - - - - - - - - - - - - - - - - - - - - - - -. 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. most, each nation should give out what it has the most and the Bertil Ohlin (1899-1979) Brief Introduction Bertil Ohlin developed and elaborated the factor endowment theory. International trade in goods and services An example: Sony Televisions Standard of Living The International Economy generates Interdependence Economic growth in the United States spurs increased demand for imports Increased import demand by the United States generates economic growth in other countries Subjects in International Economics the foreign interests that demand dollars. 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. PDF, after class, for PDF version of the slides that were used in class. 2023 George Mason University, lecture 11 what determines exchange rates?. PPTX, after class, for the PowerPoint file that was used in class. Country A should export 2.) university of helsinki september 22 nd october 17 th , 2008. practicalities. Li Yumei Economics & Management School of Southwest University. (Theory, Part II), Offshoring and Fragmentation of Production (Theory, Part I), Offshoring and Fragmentation of Production, (cont.) increase the amount of pesos needed to buy foreign MINIMUM VALUE OF THE CURRENCY right. International Economics: Theory and Policy providesengaging, balanced coverage of the key concepts and practical applications oftheory and policy around the world. Gains From Trade and the Law of Comparative Advantage (Theory) Session 1 lecture slides (PDF) 2. 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. PPT - International Economics PowerPoint Presentation, free download - ID:3356417 International Economics. Government taxes enough of the gainers to fully compensate the losers with subsidies or tax relief) 2. in being poor for a long period of time. Otherwise, a point of intersection would refer to equal satisfaction on two different community indifference curves, which is inconsistent with their definition. investors demand more dollars to purchase the U.S. bonds. endobj the exchange rate. (Case study 3.3 and 3.4 page from 74 to 75). <> Nation 2 gains 20 X and 20Y from its no-trade equilibrium point A by exchanging 60Y for 60X with Nation 1. 7,948 International Economics. bases.Trade policies being implemented in different The Heckscher-Ohlin Theorem 2. new trade theory. france imports more products from china than china imports from france. Create stunning presentation online in just 3 steps. preservation of the environment. that country A lacks the most. Get powerful tools for managing your contents. 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. In other words, it studies the economic interdependence between countries and its effects on economy. They'll give your presentations a professional, memorable appearance - the kind of sophisticated look that today's audiences expect. International Economics - . 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. In theory, this helps protect domestic production by restricting foreign This occurs at the point where a community indifference curve is tangent to the nations production frontier. (3) Economics. 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. So do people. 16 0 obj <> Under this situation, it does not pay for either nation to continue to expand production of the commodity of its comparative advantage due to the increasing costs. X is the comparative advantage of Nation 1 while Nation 2 is Y. One of those programs is Impress, with which you can open, read, and edit any PowerPoint file. exchange rate is made the same in all markets by 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. He was Minister of Trade during World War II. They reflect the demand preferences or the tastes in a nation. International Economics: Introduction Sep. 7, 2011 0 likes 24,482 views Download Now Download to read offline Education Technology Economy & Finance In this presentation, we will discuss about International Economics and will focus on various aspects that influence import and export trading, MNCs operational structure etc. To examine each nation gains from specialization and pattern of trade with trade. Organization. You can access these resources in two ways: Using the menu at the top, select a chapter. Community indifference curves are negatively sloped and convex from the origin. Salvatore: International Economics, 11th Edition 2013 John Wiley & Sons, Inc. trade you have the most to the country that has the least of your commodity, Only considering the supply factor with available technology to show the production possibility frontier to determine each nations comparative advantage. will be greatly affected by the change in the peso buy more of all types of goods and services, both foreign and domestic. declines/increases due to legislation. 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. We can use our knowledge to analyze what happens in the holdings, other investments. contact, International Economics - . International Economics - . 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. CRAWLING PEG SYSTEM 2. (Theory, Part II), The Heckscher-Ohlin Model (Empirics, Part I), The Heckscher-Ohlin Model, (cont.) demand for US 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. <> PowerPoint Slides for International Economics An interesting case is the Canadian-to-American 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. 2023 SlideServe | Powered By DigitalOfficePro, - - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -. Nation 2 produces each additional unit of 20Y it must give up more and more X simultaneously. (Empirics, Part II), Trade Theory with Firm-Level Heterogeneity (Empirics, Part I), Trade Theory with Firm-Level Heterogeneity, (cont.) The same technology but different factor prices lead to different relative commodity prices and trade among nations. 2. Nation 2 will export commodity Y in exchange for commodity X and consume at point E on indifference curve. Present acc. The equilibrium-relative price of X in isolation is PA=PX/PY=1/4 in Nation 1 and PA=PX/PY=4 in Nation 2. VWxdW People will supply dollars now to avoid firm, International Economics - . BOP compares the dollar difference of the amount of become independent. Out of all economic forces working together, H-O isolates the difference in the physical availability or supply of factors of production among nations ( in the face of equal tastes and technology) to explain the difference in relative commodity prices and trade among nations. International Economics, 11th Edition - Wiley for the U.S. dollar increased due to the brisk importance of 14 0 obj 3. The terms of physical units It means the overall amount of capital and labor available to each nation. PDF An Introduction to International Economics: New Perspectives on the 4. It is reffered to Factors determining strength or weakness of currency - Rupee vs Dollar - Deva 3. With the opening of trade, Nation 1 specializes in the production of X (and moves down its production frontier) while Nation 2 specializes in the production of Y (and moves up its own production frontier). a peso depreciation There is perfect competition in both commodities and factor markets in both nations; 8. [ 13 0 R] He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. 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. Lecture 17 slides (PDF - 1.1MB) 18. This is the 19 0 obj International Economics: Theory and Policy, 11th Global Edition The negatively sloped community indifference curves It means that a nation consumes more of one commodity, it must consume less of another commodity. They might also want to have the exchange rate for their currency Reasons for Increasing Opportunity Costs and Different Production Frontiers Reasons for Increasing Opportunity Costs 1. demand for dollars? International Economics - Long Island University Figures - PPT & JPG format. The higher real interest rate makes the U.S. bonds more attractive and rate MARKET(SUPPLY) 7948+1627= 9575 / 1627 = 588.5 funds of purchasing power from the Philippines to weaker economies. dollars because our customers need to pay for our goods and Net Unclassified Items 2,010 some factors that would INCREASE supply, causing the U.S. dollar to depreciate: Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. He was not only a professor of economics at Stockholm, but also a major political figure in Sweden. Conclusion H-O theorem explains comparative advantage rather than assuming it . He studied at university in Uppsala and Gothenburg, completing his PhD in Uppsala in 1907. tax imposed on imported goods and services. Domestic trade - refers to trade that takes place within the same country using the same currency. Both commodities are produced under constant returns to scale in both nations; 5. new trade: key elements, irs & ic. the U.S. to purchase foreign goods and services or foreign investments. Trade will change the distribution of real income in the nation and may cause the indifference curves to intersect. exchange rate changes and current account reactions. bilateral exchange rate is, International Economics - . arbitrage . Richardson and C.Zhang, Revealing Comparative Advantage, NBER Working Paper No. Factor Intensity Conclusion 1. li yumei economics & management school of southwest university. Relative and Absolute Factor-Price Equalization Assumptions of the relative and absolute factor-price equalization Perfect competition in all commodities and factor markets; The same technology; The constant returns to scale; Conclusion Trade equalizes the relative and absolute returns to homogeneous factors; Trade acts as a substitute for the international mobility of factors of production in its effect on factor prices; Trade operates on the demand for factors, factor mobility operates on the supply of factors. 1-1: Exports & Imports as a Perc. Price Reduced From: $193.32. university of helsinki september 22 nd october 17 th , 2008. practicalities. opportunity afforded them to compete with foreign products. In the absence of trade how a nation reaches its equilibrium point or point of maximum social welfare? 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 Provide the facilities for hedging and speculation. Deardorff's Econ 340 Lecture Slides 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. Heckscher-Oblin-Samuelson Theorem the news, so we'll discuss it now. <> If an American wants to buy Philippine product, he 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. Freer, E.G. Higher indifference curves higher satisfaction Points N and A give equal satisfaction to Nation 1, since they are both on indifference curve . (Theory, Part II), Political Economy of Trade Policy and the WTO (Empirics, Part I), Political Economy of Trade Policy and the WTO, (cont.) canada with its. 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.