Economics International Trade Theories Essay

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Critical Thinking Assignment on international trade theories.
In Module Two, we explored the topic of Comparative Advantage. We explained the Law of Comparative Advantage as the foundation of trade theory and the basis of globalization.

In Module Three, we will explore the challenges of comparative advantage. We will critically evaluate the implications of the factor endowment theory.

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INTERNATIONAL
ECONOMICS
SEVENTEENTH EDITION
ROBERT J. CARBAUGH
© 2019 Cengage. All rights reserved.
1
Chapter 3:
Sources of
Comparative
Advantage
© 2019 Cengage. All rights reserved.
2
Chapter Outline (1 of 3)
• Factor-Endowments as a Source of Comparative
Advantage
• Is International Trade Responsible for the Loss of
American Manufacturing Jobs? How about
Robots Instead?
• Is the Factor-Endowment Theory a Good
Predictor of Trade Patterns? The Leontief
Paradox
• Economies of Scale and Comparative Advantage
© 2019 Cengage. All rights reserved.
3
Chapter Outline (2 of 3)
• Overlapping Demands as a Basis for Trade
• Intra-Industry Trade
• Technology as a Source of Comparative
Advantage: The Product Cycle Theory
• Dynamic Comparative Advantage: Industrial
Policy
© 2019 Cengage. All rights reserved.
4
Chapter Outline (3 of 3)
• WTO Rules that Illegal Government Subsidies
Support Boeing and Airbus
• Government Regulatory Policies and
Comparative Advantage
• Transportation Costs and Comparative
Advantage
© 2019 Cengage. All rights reserved.
5
Factor Endowments as a Source
of Comparative Advantage
• Ricardian theory-assumes relative labor
productivity, labor costs, product prices
differ in 2 countries before trade
• Assumption of labor as sole factor of
production rules out explanation of how
trade affects distribution of income
among factors & why some favor trade
while others oppose it
© 2019 Cengage. All rights reserved.
6
Factor-Endowment Theory (1 of 5)
• Heckscher & Ohlin’s Factor-endowment
theory (Heckscher-Ohlin theory):
• Immediate basis for trade is difference
between pre-trade relative product prices of
trading nations.
• Pre-trade prices depend on production
possibilities.
© 2019 Cengage. All rights reserved.
7
Factor-Endowment Theory (2 of 5)
• Capital/Labor Ratio
• Determines comparative advantage
• Country exports good using relatively
abundant resource
• Country imports good using large amount of
relatively scarce resource
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8
Factor-Endowment Theory (3 of 5)
TABLE 3.1 Producing Aircraft and Textiles: Factor Endowments
in the United States and China
Resource
United States
China
Capital
100 machines
20 machines
Labor
200 workers
1,000 workers
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9
Factor-Endowment Theory (4 of 5)
• Effect of resource endowments on
comparative advantage
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10
Factor-Endowment Theory (5 of 5)
TABLE 3.2 Total Capital Stock per Worker of Selected Countries in 2011*
Industrial Country
Japan
Developing Country
$297,565
South Korea
$233,959
United States
292,658
Mexico
85,597
Germany
251,468
Colombia
67,292
Australia
250,949
Brazil
64,082
Canada
198,930
China
57,703
Sweden
190,793
Philippines
34,913
Russia
107,182
Vietnam
24,721
*In 2005 U.S. dollar prices
Source: From Robert Feenstra, Robert Inklaar, and Marcel Timmer, University of Groningen, Groningen Growth
and Development Centre, Penn World Table, Version 8.0, 2013, available at
www.rug.nl/research/ggdc/data/penn-world-table.
© 2019 Cengage. All rights reserved.
11
Applying the Factor-Endowment
Theory to U.S-China Trade
TABLE 3.3 U.S.–China Merchandise Trade: 2016 (billions of dollars)
U.S. EXPORTS TO CHINA
Product
U.S. IMPORTS FROM CHINA
Value
Percent
Product
Value
Percent
Transportation equipment
25.5
22.0
Computers and electronics
161.3
34.9
Agricultural products
17.3
14.9
Electrical equipment
40.7
8.8
Computers and electronics
17.1
14.8
Manufactured commodities
39.4
8.5
Chemicals
13.5
11.7
Machinery
30.4
6.6
Machinery
8.3
7.2
Apparel
30.3
6.5
All others
34.1
29.4
All others
160.7
34.7
115.8
100.0
Total
462.8
100.0
Total
Sources: From U.S. Department of Commerce, International Trade Administration, available at
http://www.ita.doc.gov. Scroll down to Trade Stats Express (http://tse.export.gov/) and to National Trade Data. See
also Foreign Trade Division, U.S. Census Bureau.
© 2019 Cengage. All rights reserved.
12
Chinese Manufacturers Beset by
Rising Wages and a Rising Yuan
• Developing labor shortage and rising
wages because of:
• China’s one-child policy: fewer young adults
• Land policies that discourage migration from
country, since people must tend family plots or
lose them
• Inability to enroll children in city schools or
gain government services until they have
been declared urban dwellers, which may
take years
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13
Does Trade with China Take Away
Blue-Collar American Jobs?
• China has bent rules of trade (currency
manipulation, stealing intellectual property)
• Main source of growth is comparative
advantage in labor-intensive goods
• Comparative advantage may be
diminishing
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14
Factor-Price Equalization (1 of 2)
• Trade redirects demand away from relatively
expensive, scarce resource toward relatively
cheap, abundant resource in each nation.
• Cheap resource becomes relatively more
expensive.
• Expensive resource becomes relatively cheaper.
• Eventually, factor-price equalization occurs as
globalization evens things out.
• No full factor-price equalization exists in real world.
© 2019 Cengage. All rights reserved.
15
Factor-Price Equalization (2 of 2)
TABLE 3.4 Indexes of Hourly Compensation for Manufacturing Workers (U.S. = 100)
1997
2015
Norway
112
132
Germany
125
112
Austria
108
104
Netherlands
99
97
Canada
80
82
Japan
96
63
South Korea
40
60
Taiwan
31
25
Mexico
15
16
Source: From International Comparisons of Hourly Compensation Costs in Manufacturing, 2013,
The Conference Board, available at http://www.conference-board.org.
© 2019 Cengage. All rights reserved.
16
Who Gains & Loses from Trade? The
Stolper-Samuelson Theorem (1 of 3)
• Stolper-Samuelson Theorem
• Extension of factor-price equalization theory
• States that increase in price of a product increases
income earned by resources used intensively in its
production
• Decrease in price of a product reduces income of
resources used intensively in its production
© 2019 Cengage. All rights reserved.
17
Who Gains & Loses from Trade? The
Stolper-Samuelson Theorem (2 of 3)
• Stolper-Samuelson Theorem
• Implies that export of product that embodies large
amounts of relatively cheap, abundant resource
makes resource scarcer, driving up its price/
income
• Import of product that embodies large amounts of
relatively expensive, scarce resource makes
resource less scarce, driving down its price/
income
© 2019 Cengage. All rights reserved.
18
Who Gains & Loses from Trade? The
Stolper-Samuelson Theorem (3 of 3)
Stolper-Samuelson Theorem
• There are winners and losers from trade
• Magnification effect:
• Change in price of resource is greater than change
in price of good that uses the resource intensively
© 2019 Cengage. All rights reserved.
19
Is International Trade a
Substitute for Migration? (1 of 2)
• Immigrants contribute to U.S. economy:
• Increase the size of the labor force
• Fill low-skilled jobs that few native-born
Americans are willing and available to do
• Bring jobs that contribute to the U.S. as a leader
in technological innovation
• Critics say:
• They take jobs away from Americans
• Suppress domestic wages
• Consume sizable amounts of public services
© 2019 Cengage. All rights reserved.
20
Is International Trade a
Substitute for Migration? (2 of 2)
• Can trade reduce immigration?
• International movements in resources are not
essential
• International trade in products can achieve same
result
• Complement labor migration, short and nearlong terms
• Expanding trade results in some unemployed
workers forced to seek employment abroad
© 2019 Cengage. All rights reserved.
21
Specific-Factors Theory: Trade
and the Distribution of Income
• Specific factors: factors that cannot move
easily from one industry to another
• Workers acquire skills for specific occupations, not
easily transferable to other industries
• Specific-factors theory
• Analyzes the income distribution effects of trade
in the short term, when resources are immobile
among industries
• Resources specific to import-competing industries lose
as a result of trade
• Resources specific to export industries gain as a result
of trade
© 2019 Cengage. All rights reserved.
22
Does Trade Make the Poor Even
Poorer? (1 of 4)
• Wage gap: skilled versus unskilled workers
• Caused by some combination of trade,
technology, education, immigration, and union
weakness
• Income inequality: pervasive
• Wages of skilled workers “relative” to those of
unskilled workers
• Outcome of the interaction between supply and
demand in the labor market
© 2019 Cengage. All rights reserved.
23
Does Trade Make the Poor Even
Poorer? (2 of 4)
• Wage ratio
• Wage of skilled workers divided by the wage
of unskilled workers
• Labor ratio
• Quantity of skilled workers available divided
by the quantity of unskilled workers
© 2019 Cengage. All rights reserved.
24
Does Trade Make the Poor Even
Poorer? (3 of 4)
© 2019 Cengage. All rights reserved.
25
Does Trade Make the Poor Even
Poorer? (4 of 4)
• International trade and technological
change increase demand for skilled
workers
• Immigration decreases supply of skilled
workers relative to unskilled workers
© 2019 Cengage. All rights reserved.
26
Is International Trade Responsible for the Loss
of American Manufacturing Jobs? How about
Robots Instead?
• Machines do much of the work that
humans used to do
• Automation of American factories is more
important factor than international trade in
the loss of American factory jobs
• Presence/impact of robots will grow over
time
© 2019 Cengage. All rights reserved.
27
Is the Factor-Endowment Theory a Good
Predictor of Trade Patterns? The Leontief
Paradox (1 of 2)
• Wassily Leontief: 1st attempt to test factorendowment theory empirically
• Given: U.S. has relatively abundant capital,
relatively scarce labor
• According to theory, U.S. will:
• Export capital-intensive goods
• Import-competing goods will be labor intensive
• Leontief tested capital/labor ratios for 200 export
industries & import-competing industries in U.S. in
1947
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28
Is the Factor-Endowment Theory a Good
Predictor of Trade Patterns? The Leontief
Paradox (2 of 2)
• Leontief’s findings:
• Capital/labor ratio for U.S. exports lower than
import-competing industries
• Exports were less capital-intensive than
import-competing goods
• Findings contradicted predictions of the
factor-endowment theory: Leontief paradox
• Later studies found mixed results
© 2019 Cengage. All rights reserved.
29
Economies of Scale and
Comparative Advantage
• Increasing returns to scale
• Exit when expansion of the scale of
production capacity of a firm or industry
causes total production costs to increase
less proportionately than output
• Can be internal or external
© 2019 Cengage. All rights reserved.
30
Internal Economies of Scale
(1 of 2)
• Internal economies of scale provide
additional cost incentives for specialization
in production
• Countries will specialize in products that
have a large domestic demand (home
market effect)
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31
Internal Economies of Scale
(2 of 2)
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32
External Economies of Scale
(1 of 2)
• External economies of scale exist outside
firm and within industry
• When firm’s average costs decrease as
industry’s output increases
• Cost reduction could be caused by decrease
in resource prices or amount of resources per
output
© 2019 Cengage. All rights reserved.
33
External Economies of Scale
(2 of 2)
• Concentration of industry’s firms in geographic
area attracts large pool of specialized workers;
new knowledge of production technology spreads
among firms in area
• Expanding industry is source of growth, tax
revenues
• Component suppliers cluster close to
manufacturing center, increasing access to
specialized inputs
© 2019 Cengage. All rights reserved.
34
Overlapping Demands as a Basis
for Trade (1 of 2)
• Theory of overlapping demands:
• Factor-endowment theory explains trade in
primary products and agricultural goods
• Does not explain trade in manufactured goods,
since main force influencing manufactured-good
trade is domestic demand conditions
• Firms within country: manufactured goods for
which there is large domestic market
© 2019 Cengage. All rights reserved.
35
Overlapping Demands as a Basis
for Trade (2 of 2)
• Consumer demand conditioned
strongly by income levels
• Country’s per capita income yields particular
demand pattern
• Nations with high per capita incomes demand
luxuries
• Nations with low per capita incomes demand
necessities
© 2019 Cengage. All rights reserved.
36
Intra-Industry Trade (1 of 3)
• Inter-industry trade
• Exchange between nations of products of
different industries
• Based on inter-industry specialization
• Each nation specializes in industries in which it
enjoys comparative advantage
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37
Intra-Industry Trade (2 of 3)
• Advanced industrial nations emphasize
intra-industry trade
• Two way trade in a similar commodity
• Existence of intra-industry trade
incompatible with models of comparative
advantage
© 2019 Cengage. All rights reserved.
38
Intra-Industry Trade (3 of 3)
TABLE 3.5 Intra-industry Trade Examples: Selected
U.S. Exports and Imports, 2016 (in millions of dollars)
Category
Exports
Imports
Food and beverages
130,703
130,260
Industrial supplies
397,756
443,767
Capital goods
579,366
589,972
Automotive
149,978
350,256
Consumer goods
193,646
583,791
Source: From U.S. Census Bureau, U.S. International Trade in Goods and Services, End-Use
Categories and Commodities: FT 900, 2016.
© 2019 Cengage. All rights reserved.
39
Technology as a Source of Comparative
Advantage: The Product Cycle Theory (1 of 2)
• Technological innovations
• Nations differ in rates of technological
innovation
• Result in:
• New methods of producing existing commodities
• Production of new commodities
• Commodity improvements
• Often transitory
© 2019 Cengage. All rights reserved.
40
Technology as a Source of Comparative
Advantage: The Product Cycle Theory (2 of 2)
• Manufactured goods undergo
predictable trade cycle:
1. Manufactured good introduced to home
market
2. Domestic industry shows export strength
3. Foreign production begins
4. Domestic industry loses competitive
advantage
5. Import competition begins
© 2019 Cengage. All rights reserved.
41
Radios, Pocket Calculators, and
the International Product Cycle
• Pocket calculators illustrate product life
cycle model
• Invented in US 1961; $1,000
• By 1970, competing pocket calculators from
several U.S. & Japanese firms; $400
• More firms entered market; some assembled
product in foreign countries with lower costs
• Still more firms entered, improved technology;
by mid 1970’s, pocket calculators sold for
$10-$20, sometimes less
© 2019 Cengage. All rights reserved.
42
Japan Fades in the Electronics
Industry
• Essence of product life cycle model seen in
experience of Japanese electronics industry
• In late 1980s, Japan prepared to dominate world
electronic market
• Industry weakened during 2000-2010, exports
declining, losses increasing; executives blamed
value of yen
• Sources of comparative advantage change with time
• Competitiveness is not just about what products to offer
but which NOT to offer
© 2019 Cengage. All rights reserved.
43
Dynamic Comparative Advantage:
Industrial Policy (1 of 2)
• Dynamic comparative advantage
• Comparative advantage in particular industry
can be created through mobilization of skilled
labor, technology, and capital
• Industrial policy
• Government actively involved in creating
comparative advantage
• Strategy to revitalize, improve, and develop
an industry
© 2019 Cengage. All rights reserved.
44
Dynamic Comparative Advantage:
Industrial Policy (2 of 2)
• Industrial policy (cont.)
• Antitrust immunity, tax incentives, R&D
subsidies, loan guarantees, low-interest-rate
loans, trade protection
• Requires government to identify “winners”
• Encourage resources to move into industries with
highest growth prospects
© 2019 Cengage. All rights reserved.
45
WTO Rules that Illegal Government
Subsidies Support Boeing & Airbus (1 of 3)
• U.S. complains that Airbus receives unfair
subsidies from European governments:
• Loans at below market interest rates
• Repayment delayed until after aircraft is sold
• Repayment cancelled if sales fall short
• Airbus says their subsidies prevent U.S.
from holding worldwide monopoly in
jetliners
© 2019 Cengage. All rights reserved.
46
WTO Rules that Illegal Government
Subsidies Support Boeing & Airbus (2 of 3)
• Airbus says Boeing benefits from indirect
government subsidies
• Government organizations support aeronautics
research shared with Boeing; also, military sponsored
research & procurement
• Boeing subcontracts part of production to Japan &
China, whose producers receive government subsidies
• In 1992, U.S. & Europe agreed to curb subsidies
• 33% cap on government subsidies for product
development; indirect subsidies limited to 4% of firm’s
revenue
© 2019 Cengage. All rights reserved.
47
WTO Rules that Illegal Government
Subsidies Support Boeing & Airbus (3 of 3)
• 2005, Boeing & Airbus filed suits at WTO,
contending other received illegal subsidies
• 2010-11, WTO ruled that both received
illegal subsidies
• Boeing said would comply & reject illegal aid
• Airbus resisted abandoning aid from
European govts
• 2017, WTO declares that neither
government has removed illegal subsidies
© 2019 Cengage. All rights reserved.
48
Government Regulatory Policies
& Comparative Advantage
• Government regulations
• Workplace safety
• Occupational Safety and Health Administration
• Product safety
• Consumer Product Safety Commission
• Clean environment
• Environmental Protection Agency
• May improve wellbeing of the public
• Can result in higher costs for domestic firms
© 2019 Cengage. All rights reserved.
49
Transportation Costs &
Comparative Advantage
• Costs of moving goods, freight charges,
packing and handling expenses, and
insurance premiums
• Obstacle to trade and impede realization
of gains from trade liberalization
• Differences across countries in transport
costs
• Source of comparative advantage
• Affect volume and composition of trade
© 2019 Cengage. All rights reserved.
50
Trade Effects
• Trade effects of transportation costs
• High-cost importing country
• Produce more, consume less, and import less
• Low-cost exporting country
• Produce less, consume more, and export less
© 2019 Cengage. All rights reserved.
51
Falling Transportation Costs
Foster Trade
• Growing international trade
• Worldwide decrease in trade barriers
• Economic opening of nations that have
traditionally been minor players
• Rising shipping costs = trade
dampened/diverted while looking for shorter,
less costly routes
© 2019 Cengage. All rights reserved.
52
How Containers Revolutionized
the World of Shipping
• Late 1950s, businessman Malcom
McLean founded first American
transportation company to specialize in
containerization
• More efficient than packing and unpacking
individual items
• Drove down international shipping costs,
improved reliability
© 2019 Cengage. All rights reserved.
53
The Port of Prince Rupert: Shifting
Competitiveness in Shipping Routes
• Shipping companies seek the fastest and
least costly routes to transport Asian
products to U.S.
• Canada more competitive
• Shows that once port loses business, it is
difficult to get it back
© 2019 Cengage. All rights reserved.
54
Critical Thinking: International Trade Theories
In a critical essay, discuss at least two trade theories that can
explain Saudi Arabia’s international trade. Analyze their main
insights and challenges. Are they good predictors of trade
patterns? What implications does the Saudi Vision 2030 have
on international trade?
Directions:
• Your essay is required to be four to five pages in length,
which does not include the title page and reference pages,
which are never a part of the content minimum
requirements.
• Support your submission with course material concepts,
principles, and theories from the textbook and at least
three scholarly, peer-reviewed journal articles. Use the
Saudi Digital Library to find your resources.
• Use Saudi Electronic University academic writing
standards and follow APA style guidelines.
• It is strongly encouraged that you submit all assignments
into Turnitin prior to submitting them to your instructor
for grading. If you are unsure how to submit an
assignment into the Originality Check tool, review the
Turnitin Student Guide for step-by-step instructions.
• Review the grading rubric to see how you will be graded
for this assignment.
In the critical thinking assignment, you need to apply at
least two international trade theories to Saudi Arabia. For
example, you can apply the comparative advantage theory
and the factor endowment theory or any other theory that
you will learn in Module Three.
If you apply the comparative advantage theory you need to
emphasize that Saudi Arabia has a comparative advantage
in oil and this is what it exports. The challenges of the
theory will be some of the strong assumptions of the theory.
What are these assumptions?
The paper needs to be 4, 5 pages without the title and the
references. You need to use at least three peer-reviewed
journal articles (articles that are reviewed by experts in the
field, when you do search in the library search for peer-
reviewed journal articles). The references need to be
according to APA formatting. I will talk about APA formatting

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