KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 1 International Economics Part 3 Dr. Stefan Kooths BiTS Berlin (winter term 2013/2014)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 2 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade  General analysis of cross-border trade  Reasons for inter-industry trade: Absolute and comparative advantage  Causes and consequences of cost differences: The role of factor endowments and factor proportions  “Imperfect” competition and intra-industry trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 3 Factor proportions and factor endowments  Factor proportions »Factor intensity used in production of goods »Labor-intensive good: Ratio of labor to other factors is high relative to other goods (share of labor costs is high relative to other goods)  Factor endowments »Available factor resources within a country »Labor-abundant country: Ratio of labor to other factors is high relative to the rest of the world

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 4 Shares of the world‘s factor endowments (2007/2010)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 5 The Heckscher-Ohlin theory and income distribution  Two countries, two factors, two goods (2-2-2 model)  Fixed and fully employed factor supplies »Mobile between sectors within each country »Immobile between countries  Same consumption patters in both countries  Same (constant-return-to-scale) production technologies in both countries Trade explanation by H-O »Differences across countries in the relative availability of factors »Differences across products in the use of these factors  A country exports products that use its relatively abundant factor(s) intensively and imports products that use its relatively scarce factors intensively

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 6 Short-run and long-run effects: National losers and winners (1/2)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 7 Short-run and long-run effects: National losers and winners (2/2)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 8 The Stolper-Samuelson theorem and factor price equalization

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 9 The Rybczynski-theorem

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 10 The Leontief-paradox and empirical evidence

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 11 Outline 1.Introduction and Overview 2.Systemizing and Recording Cross-border Economic Activity 3.The Pure Theory of International Trade  General analysis of cross-border trade  Reasons for inter-industry trade: Absolute and comparative advantage  Causes and consequences of cost differences: The role of factor endowments and factor proportions  “Imperfect” competition and intra-industry trade 4.Trade Policy: Free Trade vs. Protectionism 5.Foreign Exchange Markets and the Open Macroeconomy 6.Case Study: The Euro Area Crisis 7.Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 12 Intra-industry trade (overview)  Intra-industry trade »Exports and imports in the same product category  Main drivers and explanations »Product differentiation (monopolistic competition) »Substantial internal scale economies (global oligopolies) »External scale economies (regional spill-overs, industry clusters)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 13 Measuring intra-industry trade  United States, selected products (2009)  Average percentage IIT-shares in non-food manufactured products

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 14 Internal and external scale economies and complete specialization

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 15 Monopolistic competition  Preferences for variety and product differentiation  Some internal scale economies (decreasing average cost)  Easy market entry and exit in the long run  Mild form of “imperfect” competition

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 16 Global oligopolies  Substantial internal scale economies (few large firms)  Path-dependency for firm locations  Oligopoly pricing (interdependence, game theory)  Stronger form of “imperfect” competition

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 17 External scale economies: Industry clusters  Spill-overs and regional clusters: Size of the entire industry in one location matters »Home market »Path-dependency, luck »Government interventions

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 18 Summary: Gains and losses from international trade