International Economics

TOPIC 3
International Equilibrium Analysis

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Summary and Test for Topic 2

Comparative Advantage as Trade basis: Examples for natural advantages creation: Examples for acquired advantages creation:

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Other updated
Revealed Comparative Advantage, RCA. RCA index of a country is often measured by the products share in the countrys exports in relation to its share in world trade: RCAij = (xij/Xit) / (xwj/Xwt) (Balassa,1965 ) Where, xij and xwj are the values of country is exports of product j and world exports of product j and where Xit and Xwt refer to the countrys total exports and world total exports. the World Bank:A value of less than unity implies that the country has a revealed comparative disadvantage in the product. Similarly, if the index exceeds unity, the country is said to have a revealed comparative advantage in the product. RCA is also measured by the ratio of one nations net export in a certain product to the sum of the nations total imports and exports in that category.(G-L Index) RCAij = (Xij-Mij)/(Xij+Mij) (Herb Grubel & Peter Lloyd, 1971) The value could be among 1 and -1, indicating pronounced changes from the greatest comparative advantages to disadvantages 2013/4/12 3

Research Questions
2*2 Model Extended to Many products and countries: the effect of multilateralism on each pair of products and countries, then, The new basis for trade? The term of trade? Gains from trade? Valid or invalid
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Topic 3
Briefing Trade model defined by demand side Trade equilibrium built along cross-section analysis The welfare effect of trade

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1. Social Indifference Curve

Given a disposable income and tastes, there are many possible product combinations which are at same level of satisfaction, collecting these points will create a consumers or social indifference curve (Isovalue Line)
-Paul Samuelson, 1950s.
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Indifference Curve in a Standard model

F

W
HERE, Standard model means a consumption pattern shaped by diminishing marginal utility of consumption!
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Why is the indifference curve convex? the marginal utility of consumption is always diminishing. Marginal Rate of Substitution(MRS)=Df/Dw decreases as more w consumed.

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What can be found? Demand Law is still valid in intl market Consumption in a closed economy under given income level & preference would be fixed below a relative low level Dynamic equilibrium can be achieved with trade, leaving the social welfare improved 2013/4/12

2.Equilibrium Analysis in an Autarky

A TT

PPS I

W
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Post-trade Equilibrium: Relative price change

A

I I

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Post-trade Equilibrium: Production Possibility Frontier Move 1

A

parallel

PPF

PPF W

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Post-trade Equilibrium: Production Possibility Frontier Move 2

unparallel

What are other possible PPF moves ?

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3.International Equilibrium
Homes X
Oh

Foreigns

m
Of Of

m
x
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Offer Curve
It measures the isovalue location of each country in the world market It may be the simplest tool to illustrate the trade possibility in a 2*2 model. Offer Curve equilibrium diagram shows directly a shift of X/M in the market in line with TT. -Harberler, 1930s
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4.Further Study
Immiserizing Growth , P67 Case study: Petroleum and Oil Products in an International Equilibrium Questions: 1.What determines the advantage of oil exporting countries in international trade? 2.What are the major factor affecting the high oil price? 3. Will high oil price hurt the comparative advantage of other industries? 4. On what basis will you give out the oil price trend?
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Further Readings
1.Lutz Kilian, Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy? University of Michigan CEPR, January 1, 2006 2.Lutz Kilian, Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market. University of Michigan and CEPR, September 28, 2006. 3.Wei.Petroleum and Oil Products in an International Equilibrium, 2009
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