CUNY Brooklyn College Global Economics Essay

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Economics

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Comparative advantage influences international trade patterns. Countries are constantly trying to achieve and/or maintain it. However, the determinants of a country’s comparative advantage are numerous. In a critical essay, please:

Explain factor-price structures considering the Hecksher-Ohlin (H-O) model.

Appraise the challenges that may be encountered by a developing versus a developed nation.

Analyze in which commodities, other than oil, will the Kingdom of Saudi Arabia have a comparative advantage according to the H-O model, after the Saudi Vision 2030 is fully implemented?


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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 Developing Country Japan $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 U.S. IMPORTS FROM CHINA Product 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 Total 115.8 100.0 Total 462.8 100.0 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. All rights reserved. 50 Trade Effects • Trade effects of transportation costs • High-cost importing country • Produce more, consume less, and import less • Low-cost exporting country • Produce less, consume more, and export less © 2019 Cengage. All rights reserved. 51 Falling Transportation Costs Foster Trade • Growing international trade • Worldwide decrease in trade barriers • Economic opening of nations that have traditionally been minor players • Rising shipping costs = trade dampened/diverted while looking for shorter, less costly routes © 2019 Cengage. All rights reserved. 52 How Containers Revolutionized the World of Shipping • Late 1950s, businessman Malcom McLean founded first American transportation company to specialize in containerization • More efficient than packing and unpacking individual items • Drove down international shipping costs, improved reliability © 2019 Cengage. All rights reserved. 53 The Port of Prince Rupert: Shifting Competitiveness in Shipping Routes • Shipping companies seek the fastest and least costly routes to transport Asian products to U.S. • Canada more competitive • Shows that once port loses business, it is difficult to get it back © 2019 Cengage. All rights reserved. 54 INTERNATIONAL ECONOMICS SEVENTEENTH EDITION ROBERT J. CARBAUGH © 2019 Cengage. All rights reserved. 1 Chapter 1: The International Economy and Globalization © 2019 Cengage. All rights reserved. 2 Chapter Outline • Economic Interdependence: Federal Reserve Incites Global Backlash • Globalization of Economic Activity • Waves of Globalization • The United States as an Open Economy • Why Is Globalization Important? • Globalization and Competition • Common Fallacies of International Trade • Is International Trade an Opportunity or a Threat to Workers? • Has Globalization Gone Too Far? © 2019 Cengage. All rights reserved. 3 Economic Interdependence (1 of 2) High degree of economic interdependence • No nation exists in economic isolation • All aspects of a nation’s economy linked to economies of trading partners • Reflects historical evolution of the world’s economic and political order • Economic interdependence is complex, and its effects are uneven © 2019 Cengage. All rights reserved. 4 Economic Interdependence (2 of 2) • High degree of economic interdependence (cont.) • Steps toward international cooperation • Mutually advantageous for trading nations • Protectionist pressures • Some developing nations argue that liberalized trading system serves to keep them in poverty © 2019 Cengage. All rights reserved. 5 Economic Interdependence: Fed Policy Incites Backlash • Domestic economic policies have spillover effects on other economies • Quantitative easing by Fed, intended to stimulate U.S. economy during Great Recession • criticized by U.S. trading partners as attempt to improve American competitiveness through depreciation of dollar © 2019 Cengage. All rights reserved. 6 Globalization of Economic Activity (1 of 2) • Globalization • Process of greater interdependence between countries and their citizens • Increased international flows of • Goods, services, people • Investments in equipment, factories, stocks, bonds • Globalization is political, technological, cultural, and economic © 2019 Cengage. All rights reserved. 7 Globalization of Economic Activity (2 of 2) • What forces are driving globalization? • Technological change • Advances in transport technology • Widespread liberalization of investment transactions • Development of international financial markets © 2019 Cengage. All rights reserved. 8 Waves of Globalization (1 of 14) • History of globalization tied to evolution of trade • In late 1700s and 1800s, mass production and improved transportation made international trade easier; most goods tradeable • Rise of global manufacturing in 1990s characterized by geographical fragmentation of productive processes and offshoring of industrial tasks © 2019 Cengage. All rights reserved. 9 Waves of Globalization (2 of 14) • First Wave of Globalization: 1870–1914 • Decreases in tariff barriers • Technological developments • Declining transportation costs; shift from sail to steamships; railways • Driven by European and American businesses and individuals © 2019 Cengage. All rights reserved. 10 Waves of Globalization (3 of 14) • First Wave of Globalization: 1870–1914 (cont.) • Exports as share of world income nearly doubled to 8% • Per capita incomes increased 1.3% per year • Previous 50 years: 0.5% per year © 2019 Cengage. All rights reserved. 11 Waves of Globalization (4 of 14) • First Wave of Globalization: 1870–1914 (cont.) • Nations that actively participated in globalization became richest countries in world • Ended by World War I © 2019 Cengage. All rights reserved. 12 Waves of Globalization (5 of 14) • Great Depression of 1930s • Governments practiced protectionism • Raised tariffs on imports • Tried to shift demand into domestic markets to promote domestic sales and jobs • Exports as share of national income fell from 8% to 5% © 2019 Cengage. All rights reserved. 13 Waves of Globalization (6 of 14) • Second Wave of Globalization: 1945–1980 • Renewed incentive for globalization • Falling transportation costs fostered increased trade • Trade liberalization not uniform © 2019 Cengage. All rights reserved. 14 Waves of Globalization (7 of 14) • Differential impacts of second wave • Developed countries largely freed of barriers • Greatly increased the exchange of manufactured goods • Raised incomes • Developing countries • Only agricultural exports that do not compete with agriculture in developed country free of barriers © 2019 Cengage. All rights reserved. 15 Waves of Globalization (8 of 14) • Second Wave of Globalization: 1945–1980 (cont.) • New kind of trade • Rich country specialization in manufacturing niches • Gained productivity through agglomeration economies • Firms clustered together • Some clusters produced same product; others connected by vertical linkages • Benefits only those in clusters © 2019 Cengage. All rights reserved. 16 Waves of Globalization (9 of 14) • Second Wave of Globalization: 1945–1980 (cont.) • Developing countries as group left behind • Continuing trade barriers, unfavorable investment climates, antitrade policies, dependence on agricultural and natural-resource products © 2019 Cengage. All rights reserved. 17 Waves of Globalization (10 of 14) • Latest Wave of Globalization (1980– present) • Some developing countries (e.g. China, India, Brazil) broke into world markets for manufacturing • Other developing countries marginalized, causing incomes to decrease and poverty to rise • Significant international capital movements © 2019 Cengage. All rights reserved. 18 Waves of Globalization (11 of 14) • Latest Wave of Globalization (1980– present) (cont.) • Some developing countries have competitive advantage in labor-intensive manufacturing (e.g. Bangladesh) • Protectionist policies in developed countries © 2019 Cengage. All rights reserved. 19 Waves of Globalization (12 of 14) • Latest Wave of Globalization (1980– present) (cont.) • Foreign outsourcing • Products manufactured in more than one country • Manufacturing moved to wherever costs were lowest • Job losses for some workers in developed countries • Cries for laws restricting outsourcing © 2019 Cengage. All rights reserved. 20 Waves of Globalization (13 of 14) • Latest Wave of Globalization (1980– present) (cont.) • By 2000s, foreign outsourcing of professionalized work • Information Age • Internet, high-speed data • Sending upscale jobs offshore • Accounting, chip design, engineering, basic research, and financial analysis © 2019 Cengage. All rights reserved. 21 Waves of Globalization (14 of 14) • Latest Wave of Globalization (1980– present) (cont.) • Integrated factory floor increasingly replaced by network of individual, specialized suppliers • Countries tend to specialize in specific stages of production • E.g. Boeing 787 Dreamliner © 2019 Cengage. All rights reserved. 22 TABLE 1.1 The Fruits of Free Trade: A Global Fruit Basket On a trip to the grocery store, consumers can find goods from all over the globe. Fruit Country Fruit Country Apples New Zealand Limes El Salvador Apricots China Oranges Australia Bananas Ecuador Pears South Korea Blackberries Canada Pineapples Costa Rica Blueberries Chile Plums Guatemala Coconuts Philippines Raspberries Mexico Grapefruit Bahamas Strawberries Poland Grapes Peru Tangerines South Africa Kiwifruit Italy Watermelons Honduras Lemons Argentina Source: From “The Fruits of Free Trade,” Annual Report, Federal Reserve Bank of Dallas, 2002, p. 3. © 2019 Cengage. All rights reserved. 23 The U.S. as an Open Economy (1 of 8) • Trade patterns • Openness • Rough measure of the importance of international trade in a nation’s economy • Nation’s exports and imports as a percentage of its Gross Domestic Product (GDP) © 2019 Cengage. All rights reserved. 24 The U.S. as an Open Economy (2 of 8) • Openness (cont.) • Large countries – lower measures of openness • Less reliant on international trade • Firms can attain optimal production size without having to export due to the population and economic size • Small countries – higher measures of openness © 2019 Cengage. All rights reserved. 25 The U.S. as an Open Economy (3 of 8) • Openness of the U.S. economy, 1890– 2018 • Less open to international trade, 1890–1950 • Two world wars + Great Depression of the 1930s • Reduced dependence on trade • National security reasons • Protect home industries from import competition © 2019 Cengage. All rights reserved. 26 The U.S. as an Open Economy (4 of 8) • Openness of the U.S. economy, 1890– 2018 (cont.) • After World War II — negotiated reductions in trade barriers • Rising world trade; technological improvements in shipping and communications © 2019 Cengage. All rights reserved. 27 The U.S. as an Open Economy (5 of 8) • Openness of the U.S. economy, 1890– 2018 (cont.) • Relative importance of international trade increasing • Example: need for personal computers with imported components © 2019 Cengage. All rights reserved. 28 The U.S. as an Open Economy (6 of 8) TABLE 1.3 Top 8 Countries with Whom the United States Trades, 2016 Value of U.S. Total Value of Country Exports of Goods (in billions of dollars) Value of U.S. Imports of Goods (in billions of dollars) Trade (in billions of dollars) China 115.8 462.8 578.6 Canada 266.8 278.1 544.9 Mexico 231.0 294.2 525.2 Japan 63.3 132.2 195.5 Germany 49.4 114.2 163.6 United Kingdom 55.4 54.3 109.7 South Korea 42.3 69.9 112.2 France 30.9 46.8 77.7 Source: From U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade: U.S. Trade in Goods by Country, 2017. © 2019 Cengage. All rights reserved. 29 The U.S. as an Open Economy (7 of 8) • Labor and Capital • Labor mobility in U.S. has not risen in past 100 years © 2019 Cengage. All rights reserved. 30 The U.S. as an Open Economy (8 of 8) • U.S. increasingly tied to rest of the world through investment flows • Foreign ownership increasing • Concerns over rising cost of debt • International branches of U.S. banks • U.S. securities are increasingly globalized © 2019 Cengage. All rights reserved. 31 Why Is Globalization Important? (1 of 5) • Law of Comparative Advantage • Each nation gains by producing goods in which it has relative advantage • If a good or service can be obtained more economically through trade, it makes sense to trade for it, not produce it © 2019 Cengage. All rights reserved. 32 Why Is Globalization Important? (2 of 5) • Law of Comparative Advantage (cont.) • International trade also gains from competitive process • Competition essential to innovation, efficiency • Global competition can result in high-cost domestic producers exiting market © 2019 Cengage. All rights reserved. 33 Why Is Globalization Important? (3 of 5) • Open economies • More competition lowers prices • Strong incentive for highest quality • Weakens monopolies © 2019 Cengage. All rights reserved. 34 Why Is Globalization Important? (4 of 5) • Open economies (cont.) • More firm turnover • Less productive firms exit • Improvement for industry © 2019 Cengage. All rights reserved. 35 Why Is Globalization Important? (5 of 5) • Economic growth rates closely related to openness, education, communications infrastructure • International trade can provide stability for producers via exports • Rapid growth increases demand for commodities © 2019 Cengage. All rights reserved. 36 Globalization and Competition (1 of 3) • Globalization Forces Kodak to Reinvent Itself • Kodak had 90% camera market; did not address competition with new technology • Fuji entered U.S. market with lower-priced film and supplies; Kodak ignored them • By mid-1990s, Fuji had 17% of market, Kodak, 75% • Kodak finally developed digital camera but was undercut by smart phones; filed for Ch 11 bankruptcy • Kodak now a small digital imaging company © 2019 Cengage. All rights reserved. 37 Globalization and Competition (2 of 3) • Bicycle Imports Force Schwinn to Downshift • Schwinn bicycles once standard • Competitors produced mountain bikes and racing bikes; cheap imports entered market • Schwinn moved production to non-union state; obtained foreign parts. Uneven quality; Schwinn declared bankruptcy • Today Schwinn made in China © 2019 Cengage. All rights reserved. 38 Globalization and Competition (3 of 3) • Element Electronics Survives by Moving TV Production to America • Once, 150 U.S. TV manufacturers • Imports from Japan, China, South Korea, others • Flat panel TVs lighter, cheaper to ship from Asia • By 2000, no U.S. TV manufacturers • Costs in China rising; U.S. factories more competitive • Element Electronics became only TV manufacturer in U.S.; “Made in America” logo © 2019 Cengage. All rights reserved. 39 Common Fallacies of International Trade (1 of 2) • “Trade is a zero-sum activity” • False; both partners gain from trade • “Imports result in unemployment and burden the economy, while exports promote growth and jobs” • False; source of fallacy is failure to consider connection between imports and exports © 2019 Cengage. All rights reserved. 40 Common Fallacies of International Trade (2 of 2) • “Tariffs, quotas, and other imports result in more jobs for domestic workers” • False; fails to recognize that a reduction in imports does not occur in isolation © 2019 Cengage. All rights reserved. 41 Is the United States Losing Its Innovation Edge? • Some economists say U.S. is losing its innovation edge • Manufacturing is key to R & D that generates inventions • Other economists disagree • All of the key technologies and high-valueadded activities are U.S. © 2019 Cengage. All rights reserved. 42 International Trade: Opportunity or Threat to Workers? (1 of 6) • International trade is both opportunity and threat for firms and workers (e.g. exports and closing mill in NC) © 2019 Cengage. All rights reserved. 43 International Trade: Opportunity or Threat to Workers? (2 of 6) TABLE 1.4 Millions of American Jobs Supported by Exports: Totals, Goods, and Services Year Total Goods Services 2009 9.6 5.8 3.8 2010 10.2 6.2 4.0 2011 10.9 6.6 4.3 2012 11.2 6.7 4.5 2013 11.4 6.7 4.7 2014 11.6 6.8 4.8 2015 11.5 6.7 4.8 Source: Chris Rasmussen, Office of Trade and Economic Analysis, International Trade Administration, U.S. Department of Commerce, Jobs Supported by Exports 2015: An Update, April 8, 2016. © 2019 Cengage. All rights reserved. 44 International Trade: Opportunity or Threat to Workers? (3 of 6) • International trade increases total productivity • Wages paid by exporters higher than nonexporters • Exporting industries require more educated workforce © 2019 Cengage. All rights reserved. 45 International Trade: Opportunity or Threat to Workers? (4 of 6) • Not all workers gain from international trade • Some places lose jobs to cheap imports • Concern over mass immigration for lowwage work • Particular threat to unskilled workers in developed countries © 2019 Cengage. All rights reserved. 46 International Trade: Opportunity or Threat to Workers? (5 of 6) • Hurts unskilled workers in import-competing industries • Wages increase for skilled workers • Workers — more productive • Imports do NOT decrease the total jobs in nation © 2019 Cengage. All rights reserved. 47 International Trade: Opportunity or Threat to Workers? (6 of 6) • International trade • Just another kind of technology • Adds value to inputs © 2019 Cengage. All rights reserved. 48 Has Globalization Gone Too Far? (1 of 2) • Mainstream economists=open economies provide more than closed • Critics=U.S. trade policies primarily benefit large corporations rather than average citizens © 2019 Cengage. All rights reserved. 49 Has Globalization Gone Too Far? (2 of 2) • Gnawing sense of unfairness and frustration over environment, American workers, international labor standards • Noneconomic aspects of globalization also shape international debate © 2019 Cengage. All rights reserved. 50 INTERNATIONAL ECONOMICS SEVENTEENTH EDITION ROBERT J. CARBAUGH © 2019 Cengage. All rights reserved. 51 Chapter 2: Foundations of Modern Trade Theory: Comparative Advantage © 2019 Cengage. All rights reserved. 52 Chapter Outline (1 of 2) • Historical Development of Modern Trade Theory • Production Possibilities Frontiers • Trading Under Constant-Cost Conditions • Dynamic Gains from Trade: Economic Growth • Changing Comparative Advantage • Trading under Increasing-Cost Conditions • The Impact of Trade on Jobs © 2019 Cengage. All rights reserved. 53 Chapter Outline (2 of 2) • Wooster, Ohio, Bears the Brunt of Globalization • Comparative Advantage Extended to Many Products & Countries • Factor Mobility, Exit Barriers, and Trade • Empirical Evidence on Comparative Advantage • The Case for Free Trade • Comparative Advantage & Global Supply Chains © 2019 Cengage. All rights reserved. 54 Main Concepts • Basis for trade: why do nations export and import certain products? • At what terms of trade are products exchanged in world market? • Gains from international trade: production & consumption © 2019 Cengage. All rights reserved. 55 Historical Development of Modern Trade Theory (1 of 11) • The Mercantilists, 1500–1800 • Promoted favorable trade balance by encouraging exports and discouraging imports • Sought rise in domestic output & employment • Advocated government regulation of trade (tariffs, quotas, other commercial policies) © 2019 Cengage. All rights reserved. 56 Historical Development of Modern Trade Theory (2 of 11) • Criticisms of Mercantilism • David Hume’s price-specie-flow doctrine • A favorable trade balance is possible only in short run • Adam Smith, The Wealth of Nations (1776) • Static view; world’s wealth not fixed quantity • International trade increases general level of productivity within a country as well as increases world output © 2019 Cengage. All rights reserved. 57 Historical Development of Modern Trade Theory (3 of 11) • Why Nations Trade? Absolute Advantage • Assumption: • Production costs differ among nations due to different productivities of factor inputs • Absolute Cost Advantage • Countries that use less labor to produce one unit of output • Labor theory of value – assumes that within a nation, labor is only factor of production © 2019 Cengage. All rights reserved. 58 Historical Development of Modern Trade Theory (4 of 11) • Principle of Absolute Advantage • Two-nation, two-product world • Each nation produces good absolutely more efficiently than trading partner • With trade and specialization • Countries export goods – if have absolute cost advantage • Countries import goods – if have absolute cost disadvantage © 2019 Cengage. All rights reserved. 59 Historical Development of Modern Trade Theory (5 of 11) TABLE 2.1 A Case of Absolute Advantage When Each Nation Is More Efficient in the Production of One Good World output possibilities in the absence of specialization OUTPUT PER LABOR HOUR Nation Wine Cloth United States 5 bottles 20 yards United Kingdom 15 bottles 10 yards © 2019 Cengage. All rights reserved. 60 Historical Development of Modern Trade Theory (6 of 11) • Why Nations Trade: Comparative Advantage • Emphasizes relative cost differences based on opportunity costs; basis for trade • Mutually advantageous trade possible even when nation has absolute cost disadvantage in production of both goods © 2019 Cengage. All rights reserved. 61 Historical Development of Modern Trade Theory (7 of 11) TABLE 2.2 Examples of Comparative Advantages in International Trade Country Product Canada Lumber Israel Citrus fruit Italy Wine Jamaica Aluminum ore Mexico Tomatoes Saudi Arabia Oil China Textiles Japan Automobiles South Korea Steel, ships Switzerland Watches United Kingdom Financial services © 2019 Cengage. All rights reserved. 62 Historical Development of Modern Trade Theory (8 of 11) Assumptions of Ricardo’s Principle of Comparative Advantage 1. World consists of 2 nations & 2 goods 2. Labor, fully employed & homogenous, is sole input 3. Labor can move freely only within nation 4. Technology fixed for both nations; all firms within nation utilize common production methods © 2019 Cengage. All rights reserved. 63 Historical Development of Modern Trade Theory (9 of 11) 5. Costs do not vary with level of production & proportional to labor use 6. Perfect competition prevails in all markets; firms are price takers; products are identical 7. Free trade occurs between nations; no barriers 8. Transportation costs zero; consumers don’t care whether domestically produced or imported © 2019 Cengage. All rights reserved. 64 Historical Development of Modern Trade Theory (10 of 11) 9. Firms make production decisions to maximize profits; consumers maximize satisfaction 10. No money illusion; consumers and firms take account of all prices in their decisions 11. Trade is balanced (exports pay for imports), implying no money flows between nations © 2019 Cengage. All rights reserved. 65 Historical Development of Modern Trade Theory (11 of 11) TABLE 2.3 A Case of Comparative Advantage When the United States Has an Absolute Advantage in the Production of Both Goods World output possibilities in the absence of specialization OUTPUT PER LABOR HOUR Nation Wine Cloth United States 40 bottles 40 yards United Kingdom 20 bottles 10 yards © 2019 Cengage. All rights reserved. 66 Production Possibilities Frontiers (1 of 2) • Production possibilities frontiers • Various alternative combinations of two goods a nation can produce when all factor inputs are used in their most efficient manner • Maximum output possibilities of a nation, given land, labor, capital, entrepreneurship © 2019 Cengage. All rights reserved. 67 Production Possibilities Frontiers (2 of 2) • Marginal rate of transformation (MRT) • The amount of a product a nation must sacrifice to obtain an additional unit of another good • Rate of sacrifice = opportunity cost of a product • MRT equals the absolute value of slope of production possibilities frontier © 2019 Cengage. All rights reserved. 68 Trading Under Constant-Cost Conditions (1 of 13) • Constant opportunity costs • Straight line production possibilities • Assumes factors of production perfect substitutes, and all units of a factor are of same quality • Autarky • Absence of trade © 2019 Cengage. All rights reserved. 69 Trading Under Constant-Cost Conditions (2 of 13) TABLE 2.4 Gains from Specialization and Trade: Constant Opportunity Costs (a) Production Gains from Specialization BEFORE SPECIALIZATION AFTER SPECIALIZATION NET GAIN (LOSS) Autos Wheat Autos Wheat Autos Wheat United States 40 40 120 0 80 −40 Canada 40 80 0 160 −40 80 World 80 120 120 160 40 40 (b) Consumption Gains from Trade BEFORE TRADE AFTER TRADE NET GAIN (LOSS) Autos Wheat Autos Wheat Autos Wheat United States 40 40 60 60 20 20 Canada 40 80 60 100 20 20 World 80 120 120 160 40 40 © 2019 Cengage. All rights reserved. 70 Trading Under Constant-Cost Conditions (3 of 13) • Consumption Gains from Trade • Consumption gains for both countries • Consumption points: • Beyond domestic production possibilities frontiers, so countries consume more of both goods • Terms of Trade • Rate at which country’s export product is traded for other country’s export product • Defines relative prices of the two products © 2019 Cengage. All rights reserved. 71 Trading Under Constant-Cost Conditions (4 of 13) • Domestic terms of trade: set of post-trade consumption points that a nation can achieve is determined by the rate at which its export product is traded for the other country’s export product • Slope of production possibilities frontier • Relative prices at which the two commodities can be exchanged at home • Terms of Trade for exports • For country to consume beyond production possibilities frontier, international terms of trade must be more favorable than domestic terms of trade © 2019 Cengage. All rights reserved. 72 Trading Under Constant-Cost Conditions (5 of 13) • Trading possibilities line • International terms of trade for both countries • Trade triangle for a country • Exports – along horizontal axis • Imports – along vertical axis • Terms of trade equal to slope • Complete specialization • Produces only one product © 2019 Cengage. All rights reserved. 73 Trading Under Constant-Cost Conditions (6 of 13) • Domestic cost ratio • Negatively sloped production possibilities frontier • Transforms into a positively sloped cost-ratio line • Sets outer limits for equilibrium terms of trade • Constitutes the no-trade boundary • Region of mutually beneficial trade bounded by cost ratios of the two countries © 2019 Cengage. All rights reserved. 74 FIGURE 2.2 Equilibrium Terms of Trade Limits © 2019 Cengage. All rights reserved. 75 Trading Under Constant-Cost Conditions (8 of 13) • Theory of Reciprocal Demand • Within outer limits of the terms of trade, actual terms of trade determined by relative strength of each country’s demand for other country’s product • Production costs determine outer limits of terms of trade • Reciprocal demand determines terms of trade within those limits © 2019 Cengage. All rights reserved. 76 Trading Under Constant-Cost Conditions (9 of 13) • Theory of Reciprocal Demand • Best applies when both nations are of equal economic size • If two nations are of unequal economic size • Relative demand strength of smaller nation can be dwarfed by larger nation • Domestic exchange ratio of larger nation will prevail • Small nation can export as much of the commodity as it desires © 2019 Cengage. All rights reserved. 77 Trading Under Constant-Cost Conditions (10 of 13) • Importance of Being Unimportant • For two nations of approximately same size engaged in international trade, gains from trade will be shared equally between them • If one nation is significantly larger • Larger nation – fewer gains from trade • Smaller nation – most of the gains from trade • Larger nation may continue to produce comparative-disadvantage good because smaller nation cannot meet all demand © 2019 Cengage. All rights reserved. 78 Trading Under Constant-Cost Conditions (11 of 13) • Terms-of-Trade estimates • Commodity terms of trade (a.k.a. barter terms of trade) • Measure of the international exchange ratio • Measures the relation between the prices a nation gets for its exports and the prices it pays for its imports © 2019 Cengage. All rights reserved. 79 Trading Under Constant-Cost Conditions (12 of 13) • Improvement in a nation’s terms of trade • Rise in export prices relative to import prices • A smaller quantity of export goods sold abroad to obtain a given quantity of imports • Deterioration in a nation’s terms of trade • Rise in import relative to export prices • Given quantity of imports requires sacrifice of greater quantity of exports © 2019 Cengage. All rights reserved. 80 Trading Under Constant-Cost Conditions (13 of 13) TABLE 2.5 Commodity Terms of Trade, 2015 (2000 = 100) Country Export Price Index Import Price Index Terms of Trade Germany 242 212 114 Brazil 347 305 114 United States 193 183 105 Australia 295 291 101 Argentina 216 238 91 United Kingdom 162 180 90 Canada 148 178 83 Japan 130 171 76 Sources: From International Monetary Fund, IMF Financial Statistics, Washington, DC, January 2017. See also World Bank, Export Value Index (2000 = 100) at http://data.worldbank.org/indicator and Import Value Index (2000 = 100) at http://data.worldbank.org/indicator. © 2019 Cengage. All rights reserved. 81 Dynamic Gains from Trade • Dynamic gains from international trade • Effect of trade on country’s growth rate and volume of additional resources made available to/utilized by trading country • Can arise from increased investment in equipment, economies of large-scale production, increased competition, internet use, etc. • Dwarf static gains from trade © 2019 Cengage. All rights reserved. 82 Changing Comparative Advantage (1 of 2) • Patterns of comparative advantage change over time • Productivity increases • Production possibilities frontier changes • More output can be produced with same amount of resources • Producers must hone skills to compete in more profitable areas © 2019 Cengage. All rights reserved. 83 FIGURE 2.3 Changing Comparative Advantage © 2019 Cengage. All rights reserved. 84 Trading Under Increasing-Cost Conditions (1 of 7) • Increasing opportunity costs • Gives rise to a production possibilities frontier that appears bowed outward from diagram’s origin • Larger in terms of what is sacrificed © 2019 Cengage. All rights reserved. 85 FIGURE 2.4 Production Possibilities Frontier under Increasing-Cost Conditions © 2019 Cengage. All rights reserved. 86 Trading Under Increasing-Cost Conditions (3 of 7) • Increasing-Cost Trading Case • One country specializes, producing one good; other country specializes in producing the other good • Process of specialization continues in both nations until • Relative cost of one good is identical in both nations • One country’s exports of one good equal other country’s imports of the good • Domestic rates of transformation are same © 2019 Cengage. All rights reserved. 87 FIGURE 2.5 Trading under Increasing Opportunity Costs © 2019 Cengage. All rights reserved. 88 Trading Under Increasing-Cost Conditions (5 of 7) • Production Gains • More of each good is being produced • Consumption gains • Both countries consume more of at least one good • Trade Triangle • Denotes country’s exports, imports, and terms of trade • Same for both countries © 2019 Cengage. All rights reserved. 89 Trading Under Increasing-Cost Conditions (6 of 7) TABLE 2.6 Gains from Specialization and Trade: Increasing Opportunity Costs (a) Production Gains from Specialization BEFORE SPECIALIZATION AFTER SPECIALIZATION NET GAIN (LOSS) Autos Wheat Autos Wheat Autos Wheat United States 5 18 12 14 7 −4 Canada 17 6 13 13 −4 7 World 22 24 25 27 3 3 (b) Consumption Gains from Trade BEFORE TRADE AFTER TRADE NET GAIN (LOSS) Autos Wheat Autos Wheat Autos Wheat United States 5 18 5 21 0 3 Canada 17 6 20 6 3 0 World 22 24 25 27 3 3 © 2019 Cengage. All rights reserved. 90 Trading Under Increasing-Cost Conditions (7 of 7) • Partial Specialization • Trade generally leads each country to specialize only partially in production of good in which it has comparative advantage. • Increasing costs constitute mechanism that forces costs in two trading nations to converge. • When cost differentials are eliminated, the basis for further specialization ceases to exist. © 2019 Cengage. All rights reserved. 91 The Impact of Trade on Jobs (1 of 2) • The extent to which an economy is open • Influences mix of jobs within an economy • Can cause dislocation in certain areas or industries • Has little effect on the overall level of employment © 2019 Cengage. All rights reserved. 92 FIGURE 2.6 The Impact of Trade on Jobs © 2019 Cengage. All rights reserved. 93 Wooster, Ohio, Bears the Brunt of Globalization • When resin prices skyrocketed, Rubbermaid tried to raise prices to compensate. • Walmart ceased carrying its products, broke relations, & turned to foreign producers with lower labor costs. • Profits plunged 30%; closed 9 manufacturing plants; laid off 10% of workforce. • Newell Corp purchased Rubbermaid; 1,000 more jobs lost in Wooster. © 2019 Cengage. All rights reserved. 94 Comparative Advantage Extended to Many Products & Countries (1 of 3) • More than two products: • Comparative advantage ranks goods by degree of comparative cost. • Each country exports products in which it has greatest comparative advantage. • Each country imports products in which it has greatest comparative disadvantage. • Cutoff point between exports & imports depends on relative strength of international demand. © 2019 Cengage. All rights reserved. 95 Comparative Advantage Extended to Many Products & Countries (2 of 3) • More than two countries: • Multilateral trading relations • Bilateral balance should not pertain to any two trading partners • Trade surplus with trading partners that buy many products it supplies at low cost • Trade deficit with trading partners that are low-cost suppliers of goods it imports intensively © 2019 Cengage. All rights reserved. 96 FIGURE 2.8 Multilateral Trade among the United States, Japan, and OPEC © 2019 Cengage. All rights reserved. 97 Factor Mobility, Exit Barriers, and Trade (1 of 2) • Trading assumes factors of production are mobile between different uses. • Factor mobility: ability to move factors of production out of one production process into another. • How realistic is it that factors of production can move freely within an industry in a country, can move across industries in a country, and are immobile across national borders? © 2019 Cengage. All rights reserved. 98 Factor Mobility, Exit Barriers, and Trade (2 of 2) • Exit barriers hinder market adjustments that would occur through comparative advantage. • Exit barriers in U.S. steel industry caused by: • Relatively fixed cost of union-negotiated wages & benefits. • Antiquated plants with no other use; contract termination fines; environmental problems. © 2019 Cengage. All rights reserved. 99 Empirical Evidence on Comparative Advantage (1 of 2) • Ricardian model • Implies nations export goods in which their labor productivity is relatively high. • Testing Ricardian model • MacDougall, 1951 • Export patterns of 25 industries in the United States and United Kingdom (1937) examined • 20 industries fit predicted pattern © 2019 Cengage. All rights reserved. 10 0 Empirical Evidence on Comparative Advantage (2 of 2) • Testing Ricardian model (cont.) • Stephen Golub • Found that relative unit labor costs help explain trade patterns of U.S. vis-à-vis United Kingdom, Japan, Germany, Canada, and Australia. • Limits of Ricardian model • Labor not the only factor input; production and distribution costs also impact trade • Differences in product quality impact trade as well © 2019 Cengage. All rights reserved. 10 1 Can American Workers Compete with Low-Wage Workers Abroad? • Argument highly political • Bernie Sanders believes U.S. cannot compete. • Opponents believe that Sanders’s understanding of free trade is inaccurate. • Lawrence found a strong relationship between average productivity (GDP per capita) and average wages. © 2019 Cengage. All rights reserved. 10 2 The Case for Free Trade (1 of 2) • Main arguments • For world as whole, free trade results in higher level of output and income than would occur in absence of free trade. • It allows each individual nation to achieve higher level of production and consumption than would be achieved in isolation. © 2019 Cengage. All rights reserved. 10 3 The Case for Free Trade (2 of 2) • Additional benefits of free trade: • Increased monopoly • More innovation • Wider range of product choices • Reduces international political animosities • However, trade sometimes harms particular domestic industries and workers, prompting calls for protections from imports. © 2019 Cengage. All rights reserved. 10 4 Comparative Advantage & Global Supply Chains (1 of 3) • Ricardian theory assumes production cannot move to other nations. • Today, labor, technology, capital, and ideas all shift around globe. • Today, many goods are supplied by global supply chains, international production networks that allow firms to move goods and services efficiently across national borders. © 2019 Cengage. All rights reserved. 10 5 Comparative Advantage & Global Supply Chains (2 of 3) • Global supply chains use outsourcing • Subcontracting work to another firm, or purchasing components rather than manufacturing them • Advantages of outsourcing • Reduced costs & increased competitiveness • Creation of new industries and products © 2019 Cengage. All rights reserved. 10 6 Comparative Advantage & Global Supply Chains (3 of 3) • Reshoring Production to U.S. • Wage gap narrowing • Cost of shipping goods by ocean freight increasing sharply; goods in transit for weeks • Distance made it difficult to customize goods to local markets; natural disasters, geopolitical shocks disrupt supply chains • Many firms now returning some production to U.S. © 2019 Cengage. All rights reserved. 10 7
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Name
Institution
Course
Date
Outline on Global Economics
1. Comparative Advantage
a. Summary on comparative advantage in international economics
2. Factor-price Structure using the Hecksher-Ohlin (H-O) model
a. Summary on Explanation of factor-price structures considering the HecksherOhlin (H-O) model.
3. Challenges encountered by developing and developed nations
a. Summary on Appraisal of the challenges that may be encountered by a developing
versus a developed nation.
i. Developing Nations
1. Trade barriers
2. Unfavorable investment climates
3. Dependence on agricultural and natural resource products
ii. Developed Nations
1. A lower measure of openness
2. Labor mobility
4. Saudi Arabia's comparative advantage

a. Summary on the Analysis in which commodities, other than oil, will the Kingdom
of Saudi Arabia have a comparative advantage according to the H-O model, after
the Saudi Vision 2030 is fully implemented.


1

Global Economics

Name
Institution
Course
Date

2
Comparative Advantage
Competitive advantage referee to factors that allow a business to operate more efficiently than
its rivals. For instance, a company may produce goods and services better than others, thereby
having a competitive advantage. In the international market, countries compete, and they, too, have
a competitive advantage factor known as comparative advantage. Comparative advantage is an
economy's ability to manufacture or produce goods and services at a lower opportunity cost than
its trading partners. For instance, France has a comparative advantage in the production of Wine
(Carbaugh, 2022).
Factor-price Structure using the Hecksher-Ohlin (H-O) model
Based on an economic theory, the factor-pric...


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