ECON 102 1st Edition Lecture 10 Outline of Last Lecture 1 Intervention in Efficient Markets 2 Slope of a Demand Curve Outline of Current Lecture I International Trade a Globalization b Comparative Advantage i Ricardian model ii Heckscher Ohlin Model c Supply Demand and International Trade Current Lecture Why do we care about international trade Globalization The phenomenon of growing economic linkages among countries o International trade in goods and services o International labor flows Migration o International capital flows Key Terms o Imports Goods and services purchased from other countries o Exports Goods and services sold to other countries o Autarky No trade between countries a situation where a country cannot trade Comparative Advantage o A country has a comparative advantage in producing a good or service if the opportunity cost of producing the good or service is lower for that country than for other countries Ricardian model of international trade o International trade under the assumption of constant opportunity costs straight line PPF s o This is NOT the only model for international trade Is it true that both the pauper labor argument and the sweatshop labor argument are fallacies YES IT IS o Pauper Fallacy Trade hurts standards of living in importing countries These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute o Sweatshop Fallacy Trade is bad for workers in low income exporting countries Workers must be deliberately paid poor wages doesn t mean they are getting cheated for their work o The REAL explanation for low wages in poor countries is low overall productivity Sources of Comparative Advantage o International differences in climate EX Deliveries of Chilean grapes to the United States o Differences in technology EX US vs Japan in manufacturing automobiles o Differences in factor endowments The relationship between comparative advantage and factor availability is found in an influential model of international trade the Heckscher Ohlin H O model Increasing returns to Scale and International Trade o Production of a good is characterized by increasing returns to scale if the productivity rises with the quantity of output o Increasing returns to scale can give rise to monopoly a situation in which an industry is composed of only one producer because it gives large firms a cost advantage over small ones o Increasing returns to scale can also give rise to international trade Heckscher Ohlin Model According to the Heckscher Ohlin model a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country Factor Intensity The factor intensity of production of a good is a measure of which factor is used in relatively greater quantities than other factors in production o Oil refining is capital intensive compared with clothing manufacture because oil refiners use a higher ration of capital to labor than clothing producers The model shows how comparative advantage can arise from differences in factory endowments o Goods differ in their factor intensity and countries tend to export goods that are intensive in the factors they have in abundance Supply Demand and International Trade The Effects of Imports o The domestic demand curve shows how the quantity of a good demanded by domestic consumers depends on the price of that good o The domestic supply curve shows how the quantity of a good supplied by domestic producers depends on the price of that good o The world price of a good is the price at which that good can be bought or sold abroad When a market is opened to trade competition among importers or exporters drives the domestic price to equality with the world price If the world price is lower than the autarky price trade leads to imports and a fall in the domestic price compared with the world price
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