1、Theory and Policy of International Trade2022-12-29Department of International Economics and Trade1Chapter TwoNeoclassical Trade Theory(I)Theory and Policy of International Trade2022-12-29Department of International Economics and Trade22.1 Production-possibility CurveProduction-possibility curve(ppc)
2、shows the combinations of amounts of different products that a country can produce,given the countrys available factor resources and maximum feasible productivities.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade32.1.1 Shape of PPC(1)The shape of ppc
3、 is bowed out.(2)There is a trade-off relationship between the productions of two products.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade4(3)The absolute value of slope of ppc is rising with greater cloth production.(4)With production of cloth,the o
4、pportunity cost of an extra unit of cloth is more wheat.(5)So the price of a unit of newly-produced cloth in terms of wheat is more and more.(6)The slope of tangent line is the price of cloth in terms of wheat units.CW2.1.1 Shape of PPCTheory and Policy of International Trade2022-12-29Department of
5、International Economics and Trade52.1.2 What Production Combination Is Actually Chosen?Out of all the possible production points along the ppc,which point does the nation select?At the view of producers,the point depends on the price ratio they face.Theory and Policy of International Trade2022-12-29
6、Department of International Economics and Trade62.1.2 What Production Combination Is Actually Chosen?So,the firms will try to produce at such a point where the marginal cost(price)of newly-produced unit cloth equals to the market price.Theory and Policy of International Trade2022-12-29Department of
7、International Economics and Trade72.2 Community Indifference CurvesThe ppc pictures the production side of a countrys economy.To complete the picture of the economy,we need a way to depict the determinants of demands for two products simultaneously.Theory and Policy of International Trade2022-12-29D
8、epartment of International Economics and Trade82.2 Community Indifference CurvesAn indifference curve shows the various combinations of consumption quantities(here wheat and cloth)that lead to the same level of well-being or happiness.Theory and Policy of International Trade2022-12-29Department of I
9、nternational Economics and Trade92.3 Budget Constrain Line Y=PW*QW+PC*QC QW=(PC/PW)*QC+Y/PWTheory and Policy of International Trade2022-12-29Department of International Economics and Trade102.4 Production and Consumption TogetherPPC and CIC without TradeS0 is the best production point,where the well
10、-being of the society reaches the top.And the slope of the tangible line at S0 is the market price,such as 2W/C.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade112.5 The Economic Effects of TradeWith no trade,PPCs and CICs in two countries lead to dif
11、ferent production points and prices of cloth.Two countries produce at S0,the happiness is I1,2W/C in U.S.and 0.67 W/C in the rest of the world.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade122.5 The Economic Effects of TradeWith trade,the equilibriu
12、m trade price is 1W/C,production points shifts from S0 to S1.Each country trades according to 1W/C and the happiness is I2.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade132.5.1 Effects on National and World WelfareWith trade,the U.S.can buy cloth wi
13、th lower price(from 2W/C to 1W/C)in international market and sell wheat with higher price(from 0.5 C/W to 1C/W)in international market.The U.S.gains from trade.And so does the Rest of the World.The whole welfare of the world rises.Theory and Policy of International Trade2022-12-29Department of Inter
14、national Economics and Trade142.5.2 Effects on Production and Consumption(1)Within each country output expands for the product that the country exports-more wheat produced in the United States and more cloth produced in the rest of the world.(2)Within each country output declines for the product tha
15、t the country imports-less cloth produced in the United States and less wheat produced in the rest of the world.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade152.5.2 Effects on Production and Consumption(3)The shift from no trade to free trade resul
16、ts in more efficient world production as each country expands output of the product in which it is initially the lower-cost producer.World production of wheat from 50+30=80 with no trade to 80+15=95 with trade,while world cloth production is unchanged at 120.Theory and Policy of International Trade2
17、022-12-29Department of International Economics and Trade162.5.2 Effects on Production and Consumption(4)The quantity consumed of the importable product in each country will increase,because income rises and the price of imports decline.The quantity consumed of the exportable product in each country
18、could increase,stay the same,or decrease.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade172.6 What Determines the Trade Pattern?Trade basis and pattern are determined by the relative advantages.And the relative advantage is determined by the relative
19、 price.But why would product prices differ with no trade?Theory and Policy of International Trade2022-12-29Department of International Economics and Trade182.6 What Determines the Trade Pattern?They can differ becauseProduction conditions differ-the relative shapes of the production-possibility curv
20、es differ between the countries.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade192.6 What Determines the Trade Pattern?Demand conditions differ-the relative shapes and positions of the community indifference curves differ between the countries.Some c
21、ombination of these two differences.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade202.6 What Determines the Trade Pattern?Assuming that demand patterns are similar for the countries,the production conditions are the main factors that determine the r
22、elative prices.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade212.6 What Determines the Trade Pattern?For countries,the shapes of production-possibility curves are different.The ppc for the United States is skewed toward production of wheat,and the p
23、pc for the Rest of the World is skewed toward production of cloth.There are two basic reasons.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade222.6 What Determines the Trade Pattern?First,the production technologies or resource productivities may diff
24、er between countries.This type of comparative advantage was the basis for trade in the Ricardian approach.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade232.6 What Determines the Trade Pattern?Second,the factors availability in different countries an
25、d the factors proportions used in different products are different.This is the basis of H-O theory.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade242.7 The HeckscherOhlin(H-O)TheoryThe leading theory of what determines nations trade pattern emerged i
26、n Sweden.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade252.7 The HeckscherOhlin(H-O)TheoryEli Heckscher（埃利赫克歇尔,1879-1959）,the noted Swedish economic historian,developed the core idea in a brief article in 1919.the Effect of Foreign Trade on the Dist
27、ribution of IncomeTheory and Policy of International Trade2022-12-29Department of International Economics and Trade262.7 The HeckscherOhlin(H-O)TheoryA clear overall explanation was developed and publicized in the 1930s by Heckschers student Bertil Ohlin（贝蒂俄林，1899-1979）,a Nobel laureate.Interregiona
28、l and International Trade1933Theory and Policy of International Trade2022-12-29Department of International Economics and Trade272.7 The HeckscherOhlin(H-O)TheoryHechscher-Ohlin prediction was strictly correct under mathematical conditions derived by another Nobel laureate,Paul A.Samuelson（保罗萨缪尔森,191
29、5年5月15日2009年12月13日）.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade282.7 The HeckscherOhlin(H-O)Theory HeckscherOhlin theory is based on the following assumptions:(1)Two nations,two commodities,and two factors of production.(2)Both nations use the sa
30、me technology in production.(3)Commodity X is labor intensive and commodity Y is capital intensive.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade292.7 The HeckscherOhlin(H-O)Theory(4)Both commodities are produced under constant returns to scale in b
31、oth nations.(5)Incomplete specialization in production in both nations.(6)Tastes are equal in both nations.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade302.7 The HeckscherOhlin(H-O)Theory(7)Perfect factor mobility within each nation but no internat
32、ional factor mobility.(8)No transportation costs,tariffs,or other obstructions to the free flow of international trade.(9)All resources are fully employed in both nations.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade31A country is relatively labor-
33、abundant if it has a higher ratio of labor to other factors than does the rest of the world.rruuALAL2.7 The HeckscherOhlin(H-O)TheoryTheory and Policy of International Trade2022-12-29Department of International Economics and Trade32A country is relatively land-abundant if it has a higher ratio of la
34、nd to other factors than does the rest of the world.rruuAEAE2.7 The HeckscherOhlin(H-O)TheoryTheory and Policy of International Trade2022-12-29Department of International Economics and Trade332.7 The HeckscherOhlin(H-O)TheoryA product is relatively labor-intensive if labor costs are a greater share
35、of its value than they are of the value of other products.wwccALALTheory and Policy of International Trade2022-12-29Department of International Economics and Trade342.7 The HeckscherOhlin(H-O)TheoryA product is relatively land-intensive if land costs are a greater share of its value than they are of
36、 the value of other products.ccwwAEAETheory and Policy of International Trade2022-12-29Department of International Economics and Trade352.7 The HeckscherOhlin(H-O)Theory(1)Why the relative prices of the same products are different in two countries before trade?H-O theorys explanation:relative price(
37、2W/C in US,0.67W/C in R.O.W.)comparative cost factor price(mainly by factor used intensively)factor abundance(land abundant in US,labor abundant in R.O.W.)Theory and Policy of International Trade2022-12-29Department of International Economics and Trade362.7 The HeckscherOhlin(H-O)Theory(2)What is th
38、e trade pattern?H-O theory predicts that:a country exports the product(s)that use its relatively abundant factor(s)intensively and imports the product(s)using its relatively scarce factor(s)intensively.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade3
39、72022-12-29372.8 Does H-O Theory Explain Actual Trade Patterns?The first formal efforts to test the H-O theory used the simple model of two factors of production and U.S.trade data.These tests failed to confirm the H-O theory.(Leontief Paradox，里昂惕夫之谜)Theory and Policy of International Trade2022-12-2
40、9Department of International Economics and Trade382022-12-2938Theory and Policy of International Trade2022-12-29Department of International Economics and Trade392022-12-2939How to test the H-O theory?compare the prediction with the actual trade pattern.require information on(1)Which country(ies)is(a
41、re)abundant or scarce in what factor(s)(2)Which product(s)is(are)what-factor intensive(3)Actual trade pattern2.8 Does H-O Theory Explain Actual Trade Patterns?Theory and Policy of International Trade2022-12-29Department of International Economics and Trade402022-12-2940Shares of the Worlds Factor En
42、dowments,Early 2000s2.8.1 Factor EndowmentsWhat does 26.2%mean?And other figures?What does 26.2%compared with 30.5%mean?Theory and Policy of International Trade2022-12-29Department of International Economics and Trade412022-12-29412.8.1 Factor EndowmentsIf the percentage of capital and labor of US a
43、re a and b,then a and b between 0 and 1,and the percentage of capital and labor of the rest of the world are 1-a and 1-b.If the total endowments of capital and labor in the world are M and N,then we get the following:CapitalLaborU.S.a*Mb*NR.o.W(1-a)*M(1-b)NNMbaLKUUNMbaLKOO11If ab,then U.S is capital
44、-abundantOOUULKLKIf ab,then U.S is labor-abundantOOUULKLKTheory and Policy of International Trade2022-12-29Department of International Economics and Trade422022-12-2942U.S.International Trade in Selected Products,2006 2.8.2 International TradeTheory and Policy of International Trade2022-12-29Departm
45、ent of International Economics and Trade432022-12-2943U.S.International Trade in Selected Products,2006 2.8.2 International TradeTheory and Policy of International Trade2022-12-29Department of International Economics and Trade442022-12-2944Chinas International Trade in Selected Products,2006 2.8.2 I
46、nternational TradeTheory and Policy of International Trade2022-12-29Department of International Economics and Trade452022-12-29452.8.3 Testing Results and WhyWe can see much international trade conforms to H-O prediction.However,another part of international trade does not conform.Why?!Theory and Po
47、licy of International Trade2022-12-29Department of International Economics and Trade46Multiple Choice Questions 1.Assume that Country X produces two goodssugar and shoesand that the countrys production possibility curve is“bowed-out”.As the country produces more sugar,a.the opportunity cost of sugar
48、 in terms of shoes foregone will increase.b.the opportunity cost of sugar in terms of shoes foregone will decrease.c.the opportunity cost of shoes in terms of sugar foregone will increase.d.the opportunity cost of sugar in terms of shoes foregone will be the same.Theory and Policy of International T
49、rade2022-12-29Department of International Economics and Trade47Multiple Choice Questions 2.In the two-country,two-good model with an increasing-cost production-possibility curve,the amount of both goods that are produced in the economy in autarky is determined by:a.the production-possibility curve.b
50、.the specialization point.c.the production-possibility curve and the community indifference curve.d.the terms of trade.Theory and Policy of International Trade2022-12-29Department of International Economics and Trade48Multiple Choice Questions 161220Price=0.67 bushelper yard1 bushelper yardClothC1l1
