International Trade Trade Patterns © 2017 Melvin Jameson

Sources of Comparative Advantage What kinds of differences can lead to greater relative efficiency in particular products? © 2017 Melvin Jameson

Models of Trade Model Difference Classical Comparative Advantage Factor Proportions Heckscher-Ohlin Technology-based models (product life-cycle model) Difference Natural Resource endowments Factor endowments (capital/labor ratio) Human capital: skilled (educated) vs unskilled labor © 2017 Melvin Jameson

Discussion: China Factor endowments and trade Compare US and China on availability of Labor vs. capital Unskilled vs. skilled labor Factor endowment theory predicts a country exports products that use intensively those factors with which it is well endowed. © 2017 Melvin Jameson

Discussion: China China exports to the United States Apparel, footwear, toys, and the final assembly of electronic machinery and equipment Products intensive in unskilled labor United States exports to China Aircraft, software, pharmaceuticals, and high-tech components of electrical machinery and equipment Products intensive in skilled labor and technology © 2017 Melvin Jameson

Discussion: China Manufacture, especially of unskilled labor intensive products, migrated to China. Consider the impact on World output of manufactured goods Demand for raw materials (commodities) Price of manufactured products in the US Wages in China © 2017 Melvin Jameson

Discussion: China (continued) Trends in Chinese wages and manufacturing Impact on world trade patterns Export of labor-intensive products Import of raw materials © 2017 Melvin Jameson

Dynamics of comparative advantage Some sources of comparative advantage are long lasting favorable climate vast oil reserves Others are more transient low-cost labor © 2017 Melvin Jameson

Models of Trade (continued) Intra-Industry Trade Economies of Scale (Krugman) internal external Product life cycle Difference seasonal productivity location human capital © 2017 Melvin Jameson

Intra-industry trade: Simultaneous import and export of what appears to be the same product Possible explanations product differentiation seasonal differences transportation costs © 2017 Melvin Jameson

Economies of Scale Internal EOS (increasing returns to scale) Producing on a very large scale lowers average costs The low-cost product can be exported Even absent comparative-advantage differences External EOS (Clusters) All firms in a region (cluster) enjoy lower average cost due to a concentration of specialized resources Large pool of workers with specialized human capital Specialized inputs/subcontractors Shared information and knowledge Similar average cost reduction given scale of the region © 2017 Melvin Jameson

Technology: The Product Cycle Product life-cycle Newly introduced product is highly innovative- Highly educated human resources are required. Manufacture becomes standardized – a skilled work force is required. The product becomes commoditized – low-cost labor is well-suited to production. Comparative advantage changes over the life-cycle of the product. © 2017 Melvin Jameson

Product life-cycle examples: Radio, TV manufacture: U.S. and Japan computer manufacture: U.S. – Taiwan – China © 2017 Melvin Jameson