1. International Trade Trade Patterns
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2. Sources of Comparative Advantage
What kinds of differences can lead to greater relative efficiency in particular products?
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3. 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
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4. 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.
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5. 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
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6. 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
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7. Discussion: China (continued)
Trends in Chinese wages and manufacturing
Impact on world trade patterns
Export of labor-intensive products
Import of raw materials
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8. Dynamics of comparative advantage
Some sources of comparative advantage are long lasting
favorable climate
vast oil reserves
Others are more transient
low-cost labor
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9. Models of Trade (continued)
Intra-Industry Trade
Economies of Scale (Krugman)
internal
external
Product life cycle
Difference
seasonal productivity
location
human capital
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10. Intra-industry trade:
Simultaneous import and export of what appears to be the same product
Possible explanations
product differentiation
seasonal differences
transportation costs
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11. 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
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12. 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.
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13. Product life-cycle examples:
Radio, TV manufacture: U.S. and Japan
computer manufacture: U.S. – Taiwan – China
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