ECW3121 International Trade and Finance Lecture 5

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ECW3121International Trade and FinanceLecture 5
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Heckscher-Ohlin
Stolper-Samuelson
Factor Price Equalisation
Comparative Advantage
Trade Theory Study Guide 1
Rybzcynski
Absolute Advantage
Immiserising Growth
Mercantilism
International Trade and Finance
Balance Of Payments
Foreign Exchange Markets
Non Tariff Barriers
Interest Arbitrage
TradeBlocs
Tariffs
Finance Study Guide 3
Trade Policy Study Guide 2
International Resource Movements
Tools of the Trade Policy Analysis
Exchange rate theorems
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Reading
Trade Theory
Tools of the Trade Policy Analysis

• Salvatore, Chapter 4,8

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Trade Theory
Tools of the Trade Policy Analysis

• Partial Equilibrium Analysis - trade with one
  commodity
• General Equilibrium Analysis - trade with all
  (two) commodities

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Partial Equilibrium Analysis
Trade Theory
Tools of the Trade Policy Analysis

• The study of individual decision making units
  (such as a firm, a nation or an industry) in
  isolation (i.e. abstracting from the variety of
  interconnections).
• Consider one commodity markets - both domestic
  and two nation ones.

• Use Figure 4.1
• Only looking at one commodity
• Simple demand and supply
• Prices are relative Px/Py
• Assumes that each nation is large enough to
  influence the world price.

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Equilibrium trade
Trade Theory
Tools of the Trade Policy Analysis
Partial Equilibrium Analysis
International Market
Nation 1
Nation 2
Px Py
Px Py
Px Py
Sx
Sx
Imports Exports
Sm
Exports
Imports
Dm
Dx
Dx
0
0
0
Qx
Qm
Qx
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis

• The study of the interdependence that exists
  among all markets in the economy.
• Consider interdependence between two commodities
  and two nation markets.

• Use Figure 4.3, 4.4 and 4.5
• Offer Curves - Reciprocal Demand Curves.
• Summary of Trading Activities in each nation
• Show clearly the terms and volume of trade.
• Includes Two Products, Two Nations and the
  resulting terms of trade.

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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Reciprocal Demand Curve

• Introduced by Marshall and Edgewoth.
• Shows, how much of its import commodity the
  nation demands for it to be willing to supply
  various amounts of its export commodity
• or nations willingness to import and export at
  various relative commodity prices.
• Incorporates elements of both demand for import
  and supply of export.

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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 1
Offer curve - shows the willingness of the
nation to import and export at various relative
commodity prices
Y
PAPx/Py
Y
Offer Curve Nation One
PE1
E
80
H
65
60
60
A
PA1/4
PH1/2
45
F
20
20
PH1/2
B
PA1/4
0
0
50
55
70
95
130
40
60
X
X
PA1
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
Y
PAPy/Px
PH 2
PH 2
F
85
H
40
45
0
0
85
65
20
X
X
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Nation 2
Production - Nation 2
Trade - Nation 2
Y
PA 4
Y
PAPy/Px
PA 1
PH 2
PH 2
PE 4
120
PE 1
B
F
85
60
E
60
H
40
45
40
A
0
0
85
40
80
65
100
20
X
X
60
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Offer Curve - Equilibrium
Equilibrium - corresponds to the point of
intersection of both offer curves.
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Trade Theory
Tools of the Trade Policy Analysis
General Equilibrium Analysis
Cause-effect links
Gains from Trade
Terms of Trade (Px/Py)tt
Productive Specialisation
Comparative Advantage
Output Prices (Px/Py)A
Output Prices (Px/Py)B
Heckscher-Ohlin
Stolper Samuelson
Stolper Samuelson
Incomes
Factor Prices (w/r)A
Incomes
Factor Prices (w/r)B
Factor Price Equalisation
Supply of Factors
Demand for Outputs
Demand for Factors
Supply of Factors
Demand for Outputs
Demand for Factors
Technology
Tastes UA (X,Y)
Endowment LA, KA
Technology
Tastes UB (X,Y)
Endowment LB, KB