International EconomicsBy Robert J. Carbaugh9th Edition.ppt

Carbaugh, Chap. 4 International EconomicsBy Robert J. Carbaugh9th Edition Chapter 4: Trade Model Extensions and Applications Factor endowment theory (Heckscher-Ohlin) Comparative advantage is explained entirely by different national supply conditions, especially resource endowments Nations export products that use inputs which are relatively abundant (cheap) at home, and import products which need inputs which are relatively scarce (expensive) at home Factor endowment theory: assumptions Nations all have the same tastes and preferences (same indifference curves) They use factor inputs which are of uniform quality They all use the same technology Comparative advantage according to factor endowment theory Comparative advantage according to factor endowment theory Factor endowment theory: implications Factor price equalization The shift within each nation towards use of cheaper factors, and away from expensive ones, leads to more equal factor prices (if factors are mobile) Distribution of income Trade changes domestic distribution of income as demand for different factors changes Tests of factor endowment theory Emphasize the importance of varieties of different factors (such as human capital) and accounting for changes in resource endowment; other explanations are also important Does trade worsen inequality? Trade theory suggests that countries with abundant skilled labor will import goods which are made with unskilled labor Equilibrium wage ratios for skilled/unskilled labor are affected by trade and technology change, immigration, and education training Evidence suggests that trade contributes relatively little to wage inequality, compared to technological change and other factors; better education and training are potential solutions Economies of scale specialization Economies of scale provide incentives for specialization, since per unit costs go down as production increases Trade provides a larger potential market for products, making higher production level