International Economics Faculty: Prof. D. Sunitha Raju Extension to the Basic Trade Model: Some Empirical Issues

International Economics Factor Endowments: Heckscher – Ohlin theorem Why differences in Relative Prices? Or what determines comparative advantage?  Factor intensity / abundance, technology and factor prices  Trade influences factor earnings

International Economics Heckscher-Ohlin Theorem  A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant factor and import the commodity whose production requires intensive use of nation’s relatively scarce factor (costly).  Factor endowments are basic determinants of comparative advantage  Factor abundance and their prices are a cause for difference in relative commodity prices

International Economics Factor Intensity (a)Assume: Two commodities x & Y Two factors L & K (b)Capital Intensive Production If capital – labour ratio (K/L) is greater in the production Y than in the production of X. Then Y is capital intensive. (c)Labour Intensive Production If K/L is lower in the production of X than in the production of Y then X is labour intensive

International Economics 0 0 Nation 1 Nation Y X 1X 2Y L K in Y = 1 K L. 1Y 2Y 1X 2X in Y = 4 Factor Intensities for Commodities X and Y in Nations 1 & 2

International Economics Factor Price Equalisation  International trade will bring about equalization in the relative and absolute returns to the homogenous factors across nations.  Trade is a substitute for mobility of factors  Trade tends to reduce pre-trade differences in w and r between two countries

International Economics Factor Endowments of Various Countries and Regions, as a Percentage of the World Total in 1993 Country / Region CapitalSkilled Labor Unskilled Labor All Resources United States20.8%19.4%2.6%5.6% European Union Japan Canada Rest of OECD a Mexico Rest of Latin America China India Hong Kong, South Korea, Taiwan, Singapore Rest of Asia Contd./-

International Economics Country / Region CapitalSkilled Labor Unskilled Labor All Resources Eastern Europe (including Russia) OPEC b Rest of the World Total a OECD = Organization for Economic Cooperation and Development, which includes all the other industrial countries. b OPEC = Organization of Petroleum Exporting Countries. Source: Elaboration on W.Cline, Trade and Income Distribution (Washington, D.C.: Institute of International Economics, 1997, pp

International Economics Capital Stock per Worker of Selected Countries in 1993 (in 1990 International dollar prices) a Developed Country1993Developing Country1993 Japan77,429Korea26,635 Germany61,673Chile17,699 Canada61,274Mexico14,030 France59,602Turkey10,780 United States50,233Thailand 8,106 Italy48,943Philippines 6,095 Spain38,897India 3,094 United Kingdom30,226Kenya 1,412

International Economics Export/Import Ratios in Leading Industrial Countries CountryTechnology Intensive ServicesStandardizedLabor Intensive Primary Products United States Japan West Germany France United Kingdom Canada

International Economics Export/Import Ratios in Manufacturing in Selected Asian Countries in 1993 a Part of China b Province of China Source: United Nations Conference on Trade and Development, Trade and Development Report (New York: UN, 1995), p.150. Country Technology- Intensive Physical Capital- Intensive Human Capital- Intensive Unskilled Labor- Intensive Japan China Hong Kong a Taiwan b Korea Singapore Indonesia Malaysia Thailand

International Economics Export and import correspond to the same industry Expansion of IIT - Differentiated products - Transportation costs - Production processes divided across countries Intra-Industry Trade

International Economics Shares of Intra-Industry Trade in Manufactured Products, Selected Industrial Country Developing Country United States India Japan Brazil Germany Mexico France Turkey United Kingdom Thailand Italy Korea Canada Argentina Spain Singapore Average Average Source: J. A Stone and H.H. Lee, “Determinants of Intra-Industry Trade: A Longitudinal, Cross Country Analysis,” Weltwirtschaftliches Archiv, No. 1, 1995, p.70

International Economics Intra-Industry Trade (IIT) a)Export and import of goods from the same industry b)Measure of IIT IIT = 1 - c)IIT ranges from 0 to 1 Exports - Imports Exports + Imports

International Economics Intra-Industry Trade Indexes, 1985 High-Income Countries IIT IndexMiddle-Income Countries IIT Index Low-Income Countries IIT Index United States.1371Israel.0721Thailand.0286 Canada.0550Spain.0807Dominican Republic.0120 Australia.0306Ireland.0746Sri Lanka.0186 West Germany.1473Taiwan.0569Philippines.0240 Belgium- Luxembourg.1347South Korea.0644India.0305 Average.0876Average.0274Average.0089

International Economics Intra-Industry Trade a)In homogenous products –Transportation costs –Seasonality b)In differentiated products –Vertical specialization in breaking up of production chain

International Economics Ratio of Merchandise Trade to Merchandise Value-Added, 1980, 1990, 2000 (per cent) Country Major industrialized economies46.2%51.6%76.3% Canada Germany Japan United States Emerging market economies Asia China India Hong Kong, Korea, Singapore, Taiwan Bangladesh, Indonesia, Malaysia, Pakistan, Philippines, Thailand Brazil Mexico

International Economics Trade with Economies of Scale a)Internal Economies of Scale b)External Economies of Scale c)Dynamic External Economies

International Economics Trade based on Economies of Scale  International Economies of Scale  External Economies of Scale A E B X Y I II B’ PAPA

International Economics Transport Costs and Trade a)High Transport Costs can impede trade –Limits vertical specialization –Can alter the pattern of trade through price effects b)Who bears the burden –Importer or exporter