ENC 500 Saudi Electronic University Saudi Arabia International Trade Essay

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In a critical essay, discuss at least two trade theories that can explain Saudi Arabia’s international trade. Analyze their main insights and challenges. Are they good predictors of trade patterns? What implications does the Saudi Vision 2030 have on international trade? Directions: • • • • Your essay is required to be 6 pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements. Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles. Use the Saudi Digital Library to find your resources. Use Saudi Electronic University academic writing standards and follow APA style guidelines. It is strongly encouraged that you submit all assignments into Turnitin prior to submitting them to your instructor for grading. If you are unsure how to submit an assignment into the Originality Check tool, review the Turnitin—Student Guide for step-by-step instructions. INTERNATIONAL ECONOMICS SEVENTEENTH EDITION ROBERT J. CARBAUGH © 2019 Cengage. All rights reserved. 1 Chapter 3: Sources of Comparative Advantage © 2019 Cengage. All rights reserved. 2 Chapter Outline (1 of 3) • Factor-Endowments as a Source of Comparative Advantage • Is International Trade Responsible for the Loss of American Manufacturing Jobs? How about Robots Instead? • Is the Factor-Endowment Theory a Good Predictor of Trade Patterns? The Leontief Paradox • Economies of Scale and Comparative Advantage © 2019 Cengage. All rights reserved. 3 Chapter Outline (2 of 3) • Overlapping Demands as a Basis for Trade • Intra-Industry Trade • Technology as a Source of Comparative Advantage: The Product Cycle Theory • Dynamic Comparative Advantage: Industrial Policy © 2019 Cengage. All rights reserved. 4 Chapter Outline (3 of 3) • WTO Rules that Illegal Government Subsidies Support Boeing and Airbus • Government Regulatory Policies and Comparative Advantage • Transportation Costs and Comparative Advantage © 2019 Cengage. All rights reserved. 5 Factor Endowments as a Source of Comparative Advantage • Ricardian theory-assumes relative labor productivity, labor costs, product prices differ in 2 countries before trade • Assumption of labor as sole factor of production rules out explanation of how trade affects distribution of income among factors & why some favor trade while others oppose it © 2019 Cengage. All rights reserved. 6 Factor-Endowment Theory (1 of 5) • Heckscher & Ohlin’s Factor-endowment theory (Heckscher-Ohlin theory): • Immediate basis for trade is difference between pre-trade relative product prices of trading nations. • Pre-trade prices depend on production possibilities. © 2019 Cengage. All rights reserved. 7 Factor-Endowment Theory (2 of 5) • Capital/Labor Ratio • Determines comparative advantage • Country exports good using relatively abundant resource • Country imports good using large amount of relatively scarce resource © 2019 Cengage. All rights reserved. 8 Factor-Endowment Theory (3 of 5) TABLE 3.1 Producing Aircraft and Textiles: Factor Endowments in the United States and China Resource United States China Capital 100 machines 20 machines Labor 200 workers 1,000 workers © 2019 Cengage. All rights reserved. 9 Factor-Endowment Theory (4 of 5) • Effect of resource endowments on comparative advantage © 2019 Cengage. All rights reserved. 10 Factor-Endowment Theory (5 of 5) TABLE 3.2 Total Capital Stock per Worker of Selected Countries in 2011* Industrial Country Japan Developing Country $297,565 South Korea $233,959 United States 292,658 Mexico 85,597 Germany 251,468 Colombia 67,292 Australia 250,949 Brazil 64,082 Canada 198,930 China 57,703 Sweden 190,793 Philippines 34,913 Russia 107,182 Vietnam 24,721 *In 2005 U.S. dollar prices Source: From Robert Feenstra, Robert Inklaar, and Marcel Timmer, University of Groningen, Groningen Growth and Development Centre, Penn World Table, Version 8.0, 2013, available at www.rug.nl/research/ggdc/data/penn-world-table. © 2019 Cengage. All rights reserved. 11 Applying the Factor-Endowment Theory to U.S-China Trade TABLE 3.3 U.S.–China Merchandise Trade: 2016 (billions of dollars) U.S. EXPORTS TO CHINA Product U.S. IMPORTS FROM CHINA Value Percent Product Value Percent Transportation equipment 25.5 22.0 Computers and electronics 161.3 34.9 Agricultural products 17.3 14.9 Electrical equipment 40.7 8.8 Computers and electronics 17.1 14.8 Manufactured commodities 39.4 8.5 Chemicals 13.5 11.7 Machinery 30.4 6.6 Machinery 8.3 7.2 Apparel 30.3 6.5 All others 34.1 29.4 All others 160.7 34.7 115.8 100.0 Total 462.8 100.0 Total Sources: From U.S. Department of Commerce, International Trade Administration, available at http://www.ita.doc.gov. Scroll down to Trade Stats Express (http://tse.export.gov/) and to National Trade Data. See also Foreign Trade Division, U.S. Census Bureau. © 2019 Cengage. All rights reserved. 12 Chinese Manufacturers Beset by Rising Wages and a Rising Yuan • Developing labor shortage and rising wages because of: • China’s one-child policy: fewer young adults • Land policies that discourage migration from country, since people must tend family plots or lose them • Inability to enroll children in city schools or gain government services until they have been declared urban dwellers, which may take years © 2019 Cengage. All rights reserved. 13 Does Trade with China Take Away Blue-Collar American Jobs? • China has bent rules of trade (currency manipulation, stealing intellectual property) • Main source of growth is comparative advantage in labor-intensive goods • Comparative advantage may be diminishing © 2019 Cengage. All rights reserved. 14 Factor-Price Equalization (1 of 2) • Trade redirects demand away from relatively expensive, scarce resource toward relatively cheap, abundant resource in each nation. • Cheap resource becomes relatively more expensive. • Expensive resource becomes relatively cheaper. • Eventually, factor-price equalization occurs as globalization evens things out. • No full factor-price equalization exists in real world. © 2019 Cengage. All rights reserved. 15 Factor-Price Equalization (2 of 2) TABLE 3.4 Indexes of Hourly Compensation for Manufacturing Workers (U.S. = 100) 1997 2015 Norway 112 132 Germany 125 112 Austria 108 104 Netherlands 99 97 Canada 80 82 Japan 96 63 South Korea 40 60 Taiwan 31 25 Mexico 15 16 Source: From International Comparisons of Hourly Compensation Costs in Manufacturing, 2013, The Conference Board, available at http://www.conference-board.org. © 2019 Cengage. All rights reserved. 16 Who Gains & Loses from Trade? The Stolper-Samuelson Theorem (1 of 3) • Stolper-Samuelson Theorem • Extension of factor-price equalization theory • States that increase in price of a product increases income earned by resources used intensively in its production • Decrease in price of a product reduces income of resources used intensively in its production © 2019 Cengage. All rights reserved. 17 Who Gains & Loses from Trade? The Stolper-Samuelson Theorem (2 of 3) • Stolper-Samuelson Theorem • Implies that export of product that embodies large amounts of relatively cheap, abundant resource makes resource scarcer, driving up its price/ income • Import of product that embodies large amounts of relatively expensive, scarce resource makes resource less scarce, driving down its price/ income © 2019 Cengage. All rights reserved. 18 Who Gains & Loses from Trade? The Stolper-Samuelson Theorem (3 of 3) Stolper-Samuelson Theorem • There are winners and losers from trade • Magnification effect: • Change in price of resource is greater than change in price of good that uses the resource intensively © 2019 Cengage. All rights reserved. 19 Is International Trade a Substitute for Migration? (1 of 2) • Immigrants contribute to U.S. economy: • Increase the size of the labor force • Fill low-skilled jobs that few native-born Americans are willing and available to do • Bring jobs that contribute to the U.S. as a leader in technological innovation • Critics say: • They take jobs away from Americans • Suppress domestic wages • Consume sizable amounts of public services © 2019 Cengage. All rights reserved. 20 Is International Trade a Substitute for Migration? (2 of 2) • Can trade reduce immigration? • International movements in resources are not essential • International trade in products can achieve same result • Complement labor migration, short and nearlong terms • Expanding trade results in some unemployed workers forced to seek employment abroad © 2019 Cengage. All rights reserved. 21 Specific-Factors Theory: Trade and the Distribution of Income • Specific factors: factors that cannot move easily from one industry to another • Workers acquire skills for specific occupations, not easily transferable to other industries • Specific-factors theory • Analyzes the income distribution effects of trade in the short term, when resources are immobile among industries • Resources specific to import-competing industries lose as a result of trade • Resources specific to export industries gain as a result of trade © 2019 Cengage. All rights reserved. 22 Does Trade Make the Poor Even Poorer? (1 of 4) • Wage gap: skilled versus unskilled workers • Caused by some combination of trade, technology, education, immigration, and union weakness • Income inequality: pervasive • Wages of skilled workers “relative” to those of unskilled workers • Outcome of the interaction between supply and demand in the labor market © 2019 Cengage. All rights reserved. 23 Does Trade Make the Poor Even Poorer? (2 of 4) • Wage ratio • Wage of skilled workers divided by the wage of unskilled workers • Labor ratio • Quantity of skilled workers available divided by the quantity of unskilled workers © 2019 Cengage. All rights reserved. 24 Does Trade Make the Poor Even Poorer? (3 of 4) © 2019 Cengage. All rights reserved. 25 Does Trade Make the Poor Even Poorer? (4 of 4) • International trade and technological change increase demand for skilled workers • Immigration decreases supply of skilled workers relative to unskilled workers © 2019 Cengage. All rights reserved. 26 Is International Trade Responsible for the Loss of American Manufacturing Jobs? How about Robots Instead? • Machines do much of the work that humans used to do • Automation of American factories is more important factor than international trade in the loss of American factory jobs • Presence/impact of robots will grow over time © 2019 Cengage. All rights reserved. 27 Is the Factor-Endowment Theory a Good Predictor of Trade Patterns? The Leontief Paradox (1 of 2) • Wassily Leontief: 1st attempt to test factorendowment theory empirically • Given: U.S. has relatively abundant capital, relatively scarce labor • According to theory, U.S. will: • Export capital-intensive goods • Import-competing goods will be labor intensive • Leontief tested capital/labor ratios for 200 export industries & import-competing industries in U.S. in 1947 © 2019 Cengage. All rights reserved. 28 Is the Factor-Endowment Theory a Good Predictor of Trade Patterns? The Leontief Paradox (2 of 2) • Leontief’s findings: • Capital/labor ratio for U.S. exports lower than import-competing industries • Exports were less capital-intensive than import-competing goods • Findings contradicted predictions of the factor-endowment theory: Leontief paradox • Later studies found mixed results © 2019 Cengage. All rights reserved. 29 Economies of Scale and Comparative Advantage • Increasing returns to scale • Exit when expansion of the scale of production capacity of a firm or industry causes total production costs to increase less proportionately than output • Can be internal or external © 2019 Cengage. All rights reserved. 30 Internal Economies of Scale (1 of 2) • Internal economies of scale provide additional cost incentives for specialization in production • Countries will specialize in products that have a large domestic demand (home market effect) © 2019 Cengage. All rights reserved. 31 Internal Economies of Scale (2 of 2) © 2019 Cengage. All rights reserved. 32 External Economies of Scale (1 of 2) • External economies of scale exist outside firm and within industry • When firm’s average costs decrease as industry’s output increases • Cost reduction could be caused by decrease in resource prices or amount of resources per output © 2019 Cengage. All rights reserved. 33 External Economies of Scale (2 of 2) • Concentration of industry’s firms in geographic area attracts large pool of specialized workers; new knowledge of production technology spreads among firms in area • Expanding industry is source of growth, tax revenues • Component suppliers cluster close to manufacturing center, increasing access to specialized inputs © 2019 Cengage. All rights reserved. 34 Overlapping Demands as a Basis for Trade (1 of 2) • Theory of overlapping demands: • Factor-endowment theory explains trade in primary products and agricultural goods • Does not explain trade in manufactured goods, since main force influencing manufactured-good trade is domestic demand conditions • Firms within country: manufactured goods for which there is large domestic market © 2019 Cengage. All rights reserved. 35 Overlapping Demands as a Basis for Trade (2 of 2) • Consumer demand conditioned strongly by income levels • Country’s per capita income yields particular demand pattern • Nations with high per capita incomes demand luxuries • Nations with low per capita incomes demand necessities © 2019 Cengage. All rights reserved. 36 Intra-Industry Trade (1 of 3) • Inter-industry trade • Exchange between nations of products of different industries • Based on inter-industry specialization • Each nation specializes in industries in which it enjoys comparative advantage © 2019 Cengage. All rights reserved. 37 Intra-Industry Trade (2 of 3) • Advanced industrial nations emphasize intra-industry trade • Two way trade in a similar commodity • Existence of intra-industry trade incompatible with models of comparative advantage © 2019 Cengage. All rights reserved. 38 Intra-Industry Trade (3 of 3) TABLE 3.5 Intra-industry Trade Examples: Selected U.S. Exports and Imports, 2016 (in millions of dollars) Category Exports Imports Food and beverages 130,703 130,260 Industrial supplies 397,756 443,767 Capital goods 579,366 589,972 Automotive 149,978 350,256 Consumer goods 193,646 583,791 Source: From U.S. Census Bureau, U.S. International Trade in Goods and Services, End-Use Categories and Commodities: FT 900, 2016. © 2019 Cengage. All rights reserved. 39 Technology as a Source of Comparative Advantage: The Product Cycle Theory (1 of 2) • Technological innovations • Nations differ in rates of technological innovation • Result in: • New methods of producing existing commodities • Production of new commodities • Commodity improvements • Often transitory © 2019 Cengage. All rights reserved. 40 Technology as a Source of Comparative Advantage: The Product Cycle Theory (2 of 2) • Manufactured goods undergo predictable trade cycle: 1. Manufactured good introduced to home market 2. Domestic industry shows export strength 3. Foreign production begins 4. Domestic industry loses competitive advantage 5. Import competition begins © 2019 Cengage. All rights reserved. 41 Radios, Pocket Calculators, and the International Product Cycle • Pocket calculators illustrate product life cycle model • Invented in US 1961; $1,000 • By 1970, competing pocket calculators from several U.S. & Japanese firms; $400 • More firms entered market; some assembled product in foreign countries with lower costs • Still more firms entered, improved technology; by mid 1970’s, pocket calculators sold for $10-$20, sometimes less © 2019 Cengage. All rights reserved. 42 Japan Fades in the Electronics Industry • Essence of product life cycle model seen in experience of Japanese electronics industry • In late 1980s, Japan prepared to dominate world electronic market • Industry weakened during 2000-2010, exports declining, losses increasing; executives blamed value of yen • Sources of comparative advantage change with time • Competitiveness is not just about what products to offer but which NOT to offer © 2019 Cengage. All rights reserved. 43 Dynamic Comparative Advantage: Industrial Policy (1 of 2) • Dynamic comparative advantage • Comparative advantage in particular industry can be created through mobilization of skilled labor, technology, and capital • Industrial policy • Government actively involved in creating comparative advantage • Strategy to revitalize, improve, and develop an industry © 2019 Cengage. All rights reserved. 44 Dynamic Comparative Advantage: Industrial Policy (2 of 2) • Industrial policy (cont.) • Antitrust immunity, tax incentives, R&D subsidies, loan guarantees, low-interest-rate loans, trade protection • Requires government to identify “winners” • Encourage resources to move into industries with highest growth prospects © 2019 Cengage. All rights reserved. 45 WTO Rules that Illegal Government Subsidies Support Boeing & Airbus (1 of 3) • U.S. complains that Airbus receives unfair subsidies from European governments: • Loans at below market interest rates • Repayment delayed until after aircraft is sold • Repayment cancelled if sales fall short • Airbus says their subsidies prevent U.S. from holding worldwide monopoly in jetliners © 2019 Cengage. All rights reserved. 46 WTO Rules that Illegal Government Subsidies Support Boeing & Airbus (2 of 3) • Airbus says Boeing benefits from indirect government subsidies • Government organizations support aeronautics research shared with Boeing; also, military sponsored research & procurement • Boeing subcontracts part of production to Japan & China, whose producers receive government subsidies • In 1992, U.S. & Europe agreed to curb subsidies • 33% cap on government subsidies for product development; indirect subsidies limited to 4% of firm’s revenue © 2019 Cengage. All rights reserved. 47 WTO Rules that Illegal Government Subsidies Support Boeing & Airbus (3 of 3) • 2005, Boeing & Airbus filed suits at WTO, contending other received illegal subsidies • 2010-11, WTO ruled that both received illegal subsidies • Boeing said would comply & reject illegal aid • Airbus resisted abandoning aid from European govts • 2017, WTO declares that neither government has removed illegal subsidies © 2019 Cengage. All rights reserved. 48 Government Regulatory Policies & Comparative Advantage • Government regulations • Workplace safety • Occupational Safety and Health Administration • Product safety • Consumer Product Safety Commission • Clean environment • Environmental Protection Agency • May improve wellbeing of the public • Can result in higher costs for domestic firms © 2019 Cengage. All rights reserved. 49 Transportation Costs & Comparative Advantage • Costs of moving goods, freight charges, packing and handling expenses, and insurance premiums • Obstacle to trade and impede realization of gains from trade liberalization • Differences across countries in transport costs • Source of comparative advantage • Affect volume and composition of trade © 2019 Cengage...
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Trade Theories: Saudi Arabia’s International Trade

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Trade Theories: Saudi Arabia’s International Trade
The concept of international trade refers to the exchange of goods and services between
two or more countries, and it has developed through centuries to what is witnessed today.
Primarily, international trade has experienced massive advancements over the last few decades
especially following the rapid technological boom, and people, entities, and countries are more
interconnected today than ever in history. While these advancements have availed a wide range
of benefits, they have also introduced different downsides that traders and nations must endure
for participation. The disparities thus necessitate the formulation and utilization of theories
directed at explaining international trade from an in-depth perspective. International trade
theories can be applied to different nations, and considering Saudi Aria’s dominant dependence
on oil manufacturing, the two theories most viable in explaining the country’s international trade
include Factor-Endowment Theory and Specific Factors Theory.
Factor-Endowment Theory
Heckscher and Ohlin developed the Factor-endowment theory to provide a grounded
explanation on the different underlying factors causing disparities in comparative costs within
the international trade. According to Kopp (2020), the theory is an economic model, and it points
out that countries tend to export large quantities of goods and services they produce efficiently
and in large quantities. Fundamentally, for the goods and/or services to be produced in large
quantities and efficiently, the production costs must be lower thus giving the specific nation a
competitive and comparative advantage over its rivals. The factors of endowment are said to
encompass a variety of aspects fundamental to the production of goods and services, and they
majorly consist of the resources held by a country to support the manufacturing process. The
most basic resources needed to advance or otherwise influence international trade include land,

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monetary power, labor, and entrepreneurship among others (Kelly, 2021). The differences in
factor endowments lead to different countries focusing on the production of the items they can
comfortably produce on large scale and at a lower cost. For instance, a country may have a high
labor power availability but limited capital, and it will thus specialize...


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