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Transcript of International Economics International Economics: Trade Theory and Policy WS 2013/14...
International Economics
International Economics:
Trade Theory and Policy
WS 2013/14
Christen/Leiter/Pfaffermayr
Lecture:
Mo. 8:30-11:00, HS3
Proseminar:
see SyllabusPage 1
International Economics
Literature
van Marrewijk, Ch. (2012), International Economics, Oxford University Press, 2nd ed.
Chapters from Parts I, II and III
Additional material will be covered in the Proseminar
Page 2
International Economics
Includes all the material covered in the course (lecture plus proseminar).
A positive grade in the PS is a necessity.
Course grade is an ECTS-weighted average of exam and PS.
An example of an exam plus some examples of exam questions are provided in OLAT.
Three final exams per semester.
Lecture: 70.0%Two short essays. You can choose from three topics.
Proseminar: 30.0%Three short questions.
.
Exam and Grading
Page 3
International EconomicsInternational Economics
• Determinants of trade and industry structure of an open
economy in the long run.
• The welfare effects and distributional consequences (factor
incomes) of worldwide globalization and trade liberalization.
• Labor market effects of trade and foreign direct investment.
• Trade Policy:
Instruments and their welfare effects
The impact and the welfare effects of regional trade
agreements
Questions addressed in trade theory and policy I
Page 4
International EconomicsInternational Economics
• Structural change and trade liberalization: Should European
countries protect e.g. their textile industries?
• ‘Are our wages set in Beijing?’: The impact of trade with low
wage countries on low skilled workers’ wages in Europe.
• Why do trade volumes grow faster than GDP?
• What can we expect from the multilateral trade liberalization
efforts of WTO?
• The impact of a bilateral Trade Agreements, e.g., between EU
and US?
Questions addressed in trade theory and policy II
Page 5
International EconomicsInternational Economics
• Study Guide: Stephan Schueller and Daniel Ottens Oxford
University Press
• Krugman, Paul R., Maurice Obstfeld and Marc J. Melitz:
International Economics, Theory and Policy, Pearson, 9th
ed., 2012.
• Feenstra Robert C. and Alan M. Taylor, International
Economics: International Edition, Worth Publishers, 2nd ed.,
2011
• Further literature cited in these two books, especially papers
in the academic journals
Literature and Resources I
Page 6
International EconomicsInternational Economics
FIW: http://www.fiw.ac.at/
WIFO: http://www.wifo.ac.at/
WIIW: http://www.wiiw.ac.at/
WTO: http://www.wto.org/
EU: http://ec.europa.eu/trade/
WITS: http://wits.worldbank.org/wits/
CEPII: http://www.cepii.fr/CEPII/en/bdd_modele/bdd.asp
UNCTAD: http://unctad.org/en/Pages/Statistics.aspx
GTAP: https://www.gtap.agecon.purdue.edu/
Feeenstra: http://cid.econ.ucdavis.edu/data.html
Literature and Resources II
Page 7
International EconomicsInternational Economics
p. 4: „International economics is what international economists do,…, you will only know about intern-ational economics, once you have studied it your-self“.
„…I think that an important distinguishing cha-racteristic is the general equilibrium nature of this approach.“
This forces us to be precise and complete in our explanations.
Chapter 1: The World Economy – Some Stylized Facts
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International EconomicsInternational Economics
Figure 1.1 Angus Maddison (1926 -2010)
* The portrait was painted by Carla Rodenburg in 2001. I am grateful to Angus Maddison for his permission to use this painting. Angus Maddison
Page 9
International EconomicsInternational Economics
The economic size (power?) of a nation is best measured in terms of the total value of goods and services produced in a certain time period.
Other measures of size such as land area and population are weakly correlated with economic size – look at Russia, China, India, Brazil on the one hand, and on the European Countries on the other hand.
Chap. 1.2 and 1.3:
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International EconomicsInternational Economics
1. Accurate data from the statistical offices in national currency (Maddison in our case).
2. Decide to look at GNP or GDP GDP + net receipts of factor income = GNP
GDP…market value of goods and services produced by labor and property located in a country.
GNP… market value of goods and services produced by labor and property of the nationals of a country.
3. Use the same currency ($): current US $ or PPP.
A size comparison across open countries needs three steps:
Page 11
International EconomicsInternational Economics
The dotted line is a 45º line, the axes use a logarithmic scale, and the circles are proportional to the size of GDP .
GDP and GNI, 2008 (billion current $)
10
100
1,000
10,000
100,000
10 100 1,000 10,000 100,000
Gross Domestic Product, GDP
Gro
ss N
atio
nal I
ncom
e, G
NI
USA
China
Germany
Japan
Fig 1.2: GDP and GNP, 2008 ($ billion)
Page 12
International EconomicsInternational Economics
Comparing income in current $ tends to overestimatethe differences between high and low income countries
(i) Tradable goods are subject to international competition so that the prices of such tradable goods tend to be equal when measured in the same currency.
(ii) Within a country producers of tradable and non-tradable goods compete for same resources (labor) so that the wage rate in each country reflects labor productivity.
(iii) Across countries differences in productivity in the non-tradable sectors tend to be smaller than in the tradable sectors.
In current $, the value of output tends to be under-estimated in low-income countries.
Purchasing Power Parity (PPP)
Page 13
International EconomicsInternational Economics
Example: based on the current exchange rateCost of hair cut in the US: 10$Cost of hair cut in Tansania: 1$
So the same service is priced differently: the value of production in US is overestimated by a factor 10!
United Nation income comparison project (ICP) collects price data on goods and services in all countries of the world and calculates PPP comparing prices in local currencies.
P$=PTZS E$/TZS => implied PPP:
1
10
TZS
USTZS/E P
P E
Purchasing Power Parity (PPP)-continued
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International EconomicsInternational Economics
Figure 1.3: Gross domestic product, 2008; top 15, ranked according to PPP
Page 15
International EconomicsInternational Economics
Trade flows can readily compared using exchange rates.
We distinguish merchandise trade and trade in commercial services.
Stylized facts 2008 (see http://www.fiw.ac.at/ for more recent evidence):
China has been the largest merchandize trade exporter, followed by Germany and US.
US share in world exports is just 8.5%.
Many countries have a larger share in world exports than in world production (country size matters!).
1.5 International Trade
Page 16
International EconomicsInternational Economics
The difference between exports and imports (trade balance) is more pronounced than the difference between GDP and GNP, but relative to the size of imports and exports the difference is small.
In 2008 China had the largest trade surplus in goods and services (349 bn $) followed by Germany (228 bn $).
US has the largest trade deficit (696 bn $).
In relative terms Brunei is the largest net exporter and Ethiopia the largest net-importer.
Trade openness is defined as the ratio of exports +imports to production. For Singapore this ratio is more than 234%.
Exports Relative to Imports
Page 17
International EconomicsInternational Economics
The dotted line is a 45º line, the axes use a logarithmic scale, and the circles are proportional to the size of exports.
Exports and imports of goods and services, 2008 ($ bn)
1
10
100
1,000
10,000
1 10 100 1,000 10,000
export value
impo
rt v
alue
USA
GermanyChina
Russia
Saudi Arabia
Ethiopia
Brunei
Figure 1.4: Exports and imports of goods and services, 2008 ($ billion)
Page 18
International EconomicsInternational Economics
Relative exports of goods and services, 2008 (% of GDP)
88
90
91
92
97
110
131
179
212
234
0 50 100 150 200 250
Malta
Macao
United Arab Emirates
Belgium
Bahrain
Malaysia
Seychelles
Luxembourg
Hong Kong
Singapore
Figure 1.5: Relative exports of goods and services, 2008 (% of GDP)
Page 19
International EconomicsInternational Economics
Taxes on international trade, 2008 (% of revenue)
25
26
27
32
32
35
35
44
52
57
0 10 20 30 40 50 60
Russian Federation
Niger
Bangladesh
St. Kitts and Nevis
Maldives
Madagascar
Cote d'Ivoire
Namibia
Bahamas, The
Lesotho
Figure 1.6: Taxes on international trade
Page 20
International EconomicsInternational Economics
Globalization defined by Neary (2002): The increased interdependence of national economies; trend towards greater integration of goods, labor and capital markets.
Globalization and Income: Income statistics based on Maddison’s work (in 1990 international Dollars (corrected for PPP, ensure transitivity, base country invariance and additivity).
Logarithmic scale (level and growth).
Big increase in GDP per capita in 1820 (industrial revolution).
Two waves of globalization: second half of 19th century and after WW2.
New institutional setting after WW2: income per capita +3% p.a., world income +5% p.a., world trade flows +8% .p.a.
1.6 Globalization
Page 21
International EconomicsInternational Economics
World GDP per capita (1990 international $), logarithmic scale
5,709
435444 667
1820100
1,000
10,000
0 500 1000 1500 2000
Figure 1.7: Development of world per capita income over the last 2000 years
Page 22
International EconomicsInternational Economics
Figure 1.8: Two waves of globalization in trade
Merchandise exports, % of GDP in 1990 prices
4.6
17.2
2.5
10.1
0.2
13.4
0
5
10
15
1870 1900 1930 1960 1990
world USA Japan
Page 23
International EconomicsInternational Economics
Globalization and capital:
Two similar waves of globalization in the capital markets. Sharp increase in capital mobility since the 1960thies.
Globalization and migration:
Two modern waves of migration:
1820-1913: 40 millions migrants mainly form Europe to US, Canada, South America and Australia, young and mainly low skilled workers.
After WW2 (not yet ended): Since the 1990thies the source countries are now mainly Asian and Eastern European countries.
Many countries have quotas to restrict inward migration.
Labor markets are less globally integrated than goods and capital markets.
1.6 Globalization (continued)
Page 24
International EconomicsInternational Economics
0.6
0.4
0.2
01860 1880 1900 19601920 1940 1980 2000
Foreign capital stocks; assets / world GDP0.6
0.4
0.2
01860 1880 1900 19601920 1940 1980 2000
Foreign capital stocks; assets / world GDP
Figure 1.9: Foreign capital stocks, assets / world GDP
Page 25
International EconomicsInternational Economics
Relative annual immigration flows, 1870-1998 (per 1000)
-2
0
2
4
6
1870-1913 1914-1949 1950-1973 1974-1998
Western Europe Western Offshoots
Figure 1.10: Relative migration flows, Western Europe and Western Offshoots
Page 26
International EconomicsInternational Economics
1.7: Some Stylized Facts for Austria
Page 27
International EconomicsInternational Economics
1.7: Some Stylized Facts for Austria
Page 28
International EconomicsInternational Economics
Austria‘s most important trading partners (exports in 2009)
1.7: Some Stylized Facts for Austria
Page 29
International EconomicsInternational Economics
1.7: Some Stylized Facts for Austria
Austria‘s FDI Position
Page 30
Chapter 3Classical Trade: Technology
International Economics Page 31
International Economics Page 32
Overview Ricardian (classical) model
• Technology differences between countries are the driving force behind international trade flows
• Relative (or comparative) differences are crucial, not absolute differences
• Absolute differences are important for determining a country’s wage rates and welfare level
• The production possibility frontier summarizes the state of technology and the available factors of production in final goods space
• Trade flows increase welfare (technology gains from trade)
International Economics Page 33
David Ricardo (1772-1823)
“When a country can either import a commodity or produce it at home, it compares the cost of producing at home with the cost of procuring from abroad; if the latter is less than the first, it imports.”
International Economics Page 34
Assumptions of the Ricardian technology model
• Two countries (EU and Kenya)• Two final goods (Food and Chemicals)• One factor of production (Labour)• Constant returns to scale production functions• Perfect competition• Labour is mobile between sectors, but not between countries.• Costless trade in final goods (no impediments to trade)• Technology as reflected by labor productivity differs between
countries
• General (example)
International Economics Page 35
Technology differences between countries
Production technology is summarized in a productivity table:
Labour units required to produce one unit of output
Food Chemicals
EU 2 8
Kenya 4 24
The EU technology is more productive for both goods
The EU has an absolute advantage in Food production: it requires less labour (2 units instead of 4)
The EU also has an absolute advantage in Chemicals production: it requires less labour (8 units instead of 24)
International Economics Page 36
Comparative advantage: productivity method
Labour units required to produce one unit of output
Food Chemicals
EU 2 8
Kenya 4 24
• The EU is twice as productive in the Food sector (4/2 = 2)• The EU is three times as productive in the Chemicals sector (24/8 = 3), so
The EU has a comparative advantage in Chemicals, and
Kenya has a comparative advantage in Food
International Economics Page 37
• An extra unit of Chemicals needs 8 units of labor in the EU• This labor could have made 8/2 = 4 units of Food; the opportunity cost of Chemicals production in the EU is 4 Food.• An extra unit of Chemicals in Kenya needs 24 labor• This labor could have made 24/4 = 6 units of Food; the opportunity cost of Chemicals production in Kenya is 6 Food
Comparative advantage: opportunity cost method
Labour units required to produce one unit of output
Food Chemicals
EU 2 8
Kenya 4 24
The EU has a comparative advantage in Chemicals, Kenya in Food
International Economics Page 38
The ppf is a straight line in the Ricardian model
Labour units required to produce one unit of output
Food Chemicals
EU 2 8
Kenya 4 24
• Suppose the EU has 200 units of labour available and Kenya has 120 units available (remember: it is just an example)• If all workers in the EU produce only Food, the EU can make 200/2 = 100 Food (and 0 Chemicals)• If all workers in the EU produce only Chemicals, the EU can make 200/8 = 25 Chemicals (and 0 Food)• Similarly, if all workers in Kenya produce Food total output is 120/4 = 30 Food (and 0 Chemicals); if they all produce Chemicals total output is 120/24 = 5 Chemicals (and 0 Food)
International Economics Page 39
Definition: all possible combinations of efficient production points of final goods, given the available factors of production and the state of technology;
Note that:•It is a technical specification: the ppf does not depend on the type of market competition•The ppf depends on the available factors of production: if, e.g., more labour becomes available more goods can be produced•The ppf depends on the state of technology: if new techniques become available, output increases with the same use of inputs
Production possibility frontier (ppf)
International Economics
Food
Chemicals0
30
255
100
Kenya ppf
EU ppf
A
B
CE
D
Food
Chemicals0
30
255
100
Kenya ppf
EU ppf
A
B
CE
D
Page 40
Production possibility frontiers
The EU can produce
(0 Chemicals, 100 Food) or
(20 Chemicals, 0 Food), or
any combination in between
Kenya can produce
(0 Chemicals, 30 Food) or
(5 Chemicals, 0 Food), or
any combination in between
F
C
F
C
F
EU
aa
EUaa
aL
EU
EUFEUCEU
:costsy Opportunit
CF :PPF
FaCaL :constraint Resurce
International Economics Page 41
Production in the EU; pC/pF = relative price of Chemicals
• Producer maximizing profits in
this setting is equivalent to
maximizing total revenue, given
the final goods price ratio pC/pF
Food
Chemicals
EU
• If pC/pF is low, this implies only
production of Food
PrEU slope = - pC /p
F
International Economics Page 42
Production in the EU; pC/pF = relative price of Chemicals
• Producer maximizing profits in
this setting is equivalent to
maximizing total revenue, given
the final goods price ratio pC/pF
Food
Chemicals
EU
• If pC/pF is high, this implies
only production of Chemicals
PrEU
International Economics Page 43
Production in the EU; pC/pF = relative price of Chemicals
• Producer maximizing profits in
this setting is equivalent to
maximizing total revenue, given
the final goods price ratio pC/pF
Food
Chemicals
EU
• If pC/pF is equal to the slope of
the ppf, production can be
anywhere along the ppf (to be
determined by other factors)
•Under Autarky it must hold that
pC/pF is equal to the slope of the
ppf.
International Economics Page 44
Gains form Trade
Food
Chemicals0
30
255
100
Kenya ppf
EU ppf
A
B
F
Kenyabudgetline
6.25
120
G
EU budgetline
Food
Chemicals0
30
255
100
Kenya ppf
EU ppf
A
B
F
Kenyabudgetline
6.25
120
G
EU budgetline
Relative to autarky trade increases the rel. price of chemicals in the EU (exporter) and decrease it in Kenya (importer).
Consumption can be extended in both trading partners (gains form trade).
International Economics Page 45
Value of consumption =Value of production, trade is balanced in each country.
Product prices are determined at the World market equating world demand =world supply.
Marginal rate of substitution of consumers = PC/PF.
Wages have to adjust according to productivity in each country .
Due to lower wages food producers of Kenya (holding the comparative advantage) are competitive on the world market.
Equilibirum
EUF
EUc
F
CK
EU
KF
K
EUc
EU
F
C
a
aPP
ww
aw
awPP
1
1
International Economics Page 46
Some empirical evidence
Figure 3.5 Kenya–EU exports and productivity, various sectors
-50
0
50
100
0 50 100 150 200
Relative productivity ratio (Kenya/EU); %
Ken
ya e
xpor
t (%
) -
impo
rt (
%)
food
chemicalsmachinery
International Economics Page 47
Some empirical evidence - continued
The Balassa index
j good incountry A of advantage ecomparativ Revealed 1BI
exportscountry reference in jindustry of Share
exportscountry A in jindustry of ShareBI
Aj
Aj
Exports of 28 manufacturing sectors for the member of OECD countries
Reference country is the group of all OECD countries
Observe high values for countries with a smaller industrial base such as Italy and Finland.
Observe the persistence of comparative advantages.
International Economics Page 48
Some empirical evidence - continued
Figure 3.7 Highest Balassa index, selected countries
International Economics Page 49
Some empirical evidence - continued
Figure 3.7 Highest Balassa index, selected countries
c Brazil
0
2
4
6
8
10
12
14
16
18
20
2001 2002 2003 2004 2005 2006 2007 2008
Oil seed, oleagic fruits, grain, seed, fruit, etc, nes
Sugars and sugar confectionery
d USA
0
1
2
3
4
5
2001 2002 2003 2004 2005 2006 2007 2008
Works of art, collectors pieces and antiques
Aircraft, spacecraft, and parts thereof
International Economics Page 50
Concluding remarks, Ricardian (classical) model
• Technological differences between countries are the classical driving force for international trade flows.
• Only comparative costs, not absolute costs, are important for determining the direction of trade flows.
• Absolute costs are important for determining a country’s welfare level.
• Allowing for more countries and more goods is easy, allowing for more than one factor of production is not (see neoclassical model).
International Economics Page 51
Production Structure
Chapter 4
International Economics Page 52
Overview Production Structure
• The neoclassical model focuses on differences in relative factor endowments as a cause for international trade flows.
• The main contributors are Eli Heckscher, Bertil Ohlin, and Paul Samuelson: it is therefore referred to as the HOS model.
• This chapter reviews the production structure of the model.• Neoclassical production functions with two inputs and
constant returns to scale.• Optimizing economic agents, taking prices as given.• The impact of technology differences is analyzed in Chapter
3, we therefore assume identical technology from now on.
International Economics Page 53
Paul Samuelson (1915–2009)
“Funeral by funeral, theory advances”
www.brainyquote.com
International Economics Page 54
Assumptions of the neoclassical (HOS) model
• Two countries (Austria and Bolivia)• Two final goods (Food and Manufactures)• Two factors of production (Capital and Labour)• Constant returns to scale production functions• Perfect competition in all markets• Capital and Labor is mobile between sectors, but not between
countries• Costless trade in final goods (no impediments to trade)• Identical production technology in the two countries• No factor-intensity reversal• Identical homothetic tastes in the two countries• Countries differ in their (relative) factor endowments
• General (example)
International Economics Page 55
Main results of the neoclassical (HOS) model
The HOS model derives 4 main propositions in Chapters 5-7:• Factor Price Equalization: Trade in goods (which equalizes
final goods prices) leads to the equalization of factor prices.• Stolper-Samuelson theorem: An increase in the price of a
final good increases the (real) reward to the factor used intensively in the production of that good and reduces the (real) reward to the other factor of production.
• Rybczynski theorem: An increase in the quantity of a factor of production, at constant final goods prices, leads to an increase in the production of the good using that factor intensively and a decreased production of the other good.
• Heckscher-Ohlin theorem: A country will export the final good which makes relatively intensive use of the relatively abundant factor of production.
International Economics Page 56
Neoclassical production functions
Characteristics of our neoclassical production functions• Two inputs: capital (K) and labour (L)• Substitutability: a given output level can be produced using
different combinations of inputs, i.e. the use of one input can be substituted for the use of another input
• Positive marginal product: if more capital or more labour is used output increases
• Diminishing marginal product: given the use of capital, an increase in the use of labour leads to ever smaller increases in output (similarly for capital)
• Constant returns to scale: an increase in the use of both inputs by z% also leads to an increase in output of z%
International Economics Page 57
capital owners
labourers
consumers
production manufactures
production food
producers
capital services
(rental income)
labour services
(wage income)
delivery of food (spending (1-m) on food)
delivery of manufactures (spending m on manufactures)
direction of goods and services flows(direction of money flows)
Structure of the equilibrium
International Economics Page 58
Production functions: substitutability and isoquant
• Let M be the output of
Manufactures, Km the input of
capital, Lm the input of labour
and m a capital intensity
parameter (0 < m < 1); this is a
possible production function:
Capital
Labour
• The figure on the left depicts
an isoquant for this function;
note the substitutability
between capital and labour
mmmm LKM 1
isoquant
International Economics Page 59
M=0.7
Production is constant returns to scale (CRS)
• At point A1 production M = 1Capital
Labour
M=1
A1
A2
B2
B1
• Reducing inputs by 30%
leads to point A2
• CRS implies at point A2
production M = 0.7
• Similarly for points B1 and B2
• Conclusion:
isoquant M = 0.7 is a radial
blow-up of isoquant M = 10.7 D
0.3 D
D
International Economics Page 60
Profit maximization: two-step procedure
Producer profits = revenue – production costs
Maximizing profits is a two-step procedure• First, given how much you want to produce: minimize
production costs• Second: determine the optimal output level
International Economics Page 61
Cost minimization
• Suppose you want to
produce M=1 at minimum cost
taking wage rate w and rental
rate r as given
• Total cost = wLm + rKm , a
straight line in (labour, capital)
space with slope = - w/r
Capital
Labour
• Minimum costs are achieved
at a point of tangency
between the isocost line and
the isoquant; point A, using K
capital and L labour
M=1
slope = -w/rL
KA
International Economics Page 62
Constant returns to scale and production costs
Under constant returns to scale (CRS) the isoquants are radial blow-ups of one another
Minimizing production costs is now simple:•First, we determine the cost-minimizing input combination for producing one unit of output, say K and L•Second, determine the output level, say z units. Proportionally adjust the unit inputs to produce z output, so using: zK and zL•Under CRS: total cost = (per unit cost) output
International Economics Page 63
Profit maximization, CRS, and perfect competition
Profits = [price – (per unit cost)] output
There are three possibilities• price < unit cost: optimal output level = 0, no profit• price = unit cost: optimal output level undetermined (can be
determined by other factors); profit level = 0• price > unit cost: optimal output level = infinite, profit level
is infinite not possible in economic equilibrium
Conclusion: CRS + perfect competition implies:• price unit cost• output > 0 price = unit costs
International Economics Page 64
Impact of a fall in the wage rate
The figure shows the cost-
minimizing input combination
at point A for the ratio w0/r
Suppose the wage rate falls to
w1; rotates the isocost line
Capital
Labour
Minimum costs are now
achieved at point B with a
lower capital/labor ratio
M=1
slope = -w0 /r
Aslope = -w
1 /r
B
K/L
0
K/L 1
International Economics Page 65
Food production with lower capital intensity
• The figure shows the cost-
minimizing input combination
at point A for M=1 and w/r
• Suppose Food production
has a lower capital-intensity
parameter: F < M
Capital
Labour
• For the same w/r minimum
costs for Food production are
at point B with a lower
capital/labour ratio
M=1
A
K/L
M
slope = -w/rK/LF
F=1
B
International Economics Page 66
Empirical Evidence
0
10
20
30
40
50
60
70
80
Switzerland
W. Germany
USAJapan
India
UK
Figure 4.4 Capital stock per worker×1000 $; 1990 in 1985 $
International Economics Page 67
Empirical Evidence – continued
Primary products exports (% of country's manufacturing exports), 2008
0 10 20 30 40 50 60 70 80 90
EthiopiaBrazil
AustraliaIndonesia
VietnamPakistan
NetherlandsSpainIndia
ThailandFrance
CanadaMalaysia
PolandUSA
BelgiumPhilippines
WorldItaly
SwedenAustria
Un KingdomMexico
GermanyNorway
BangladeshSwitzerland
ChinaRussia
Un Arab EmSingapore
Hong KongNigeriaTaipei
Korea SouthJapan
Saudi Arabia
International Economics Page 68
Concluding remarks Production Structure
• The neoclassical (HOS) model explains trade flows based on differences in relative factor abundance
• The HOS model derives 4 main propositions• Production uses 2 inputs (substitution between inputs) under
constant returns to scale (CRS)• The cost-minimizing input combination depends on:
– The capital-intensity parameter ()– The wage-rental ratio (w/r)
• With CRS and perfect competition: – if a good is produced price = unit production costs