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International Economics: in This Chapter
International Economics: in This Chapter
CHAPTER S I X
6 International Economics
Tenth Edition
Economies of Scale,
Imperfect Competition, and
International Trade
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
In this chapter:
Introduction
The Heckscher-Ohlin Model and New Trade
Theories
Economies of Scale and International Trade
Imperfect Competition and International Trade
Trade Based on Dynamic Technological
Differences
Costs of Transportation, Environmental
Standards, and International Trade
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
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6.1 Introduction
Introduction
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6.3A. Assumptions
(1) There are two nations (N1, N2) two commodities (X, Y)
(2) Both nations use the same technology in production.
(3) Both nations have the same amount of resources.
(4) Neither commodity is labor intensive or capital intensive.
(5) Both commodities are produced under increasing returns
to scale in both nations.
- i.e., Output grows proportionately more than the increase in inputs
of production. (eg., If all inputs are doubled, output is more than
doubled: Economies of scale.)
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6.3B. Explanation
Some aspects of the analysis:
(0) With trade, each nation becomes completely specialized in the
production of one commodity.
(1) Which of the two commodities each nation becomes specialized
may result from historical accident.
(2) In real world, the nations need not be identical in every respect.
(3) Eventually, one or a few firms in the nation will capture the entire
market for a given product, leading to monopoly or oligopoly.
(4) The nations may trade similar products in the same industry (i.e.,
intra-industry trade)
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Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
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Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
|X - M|
T=1- X+M
X = exports
M = imports
Numerator is absolute value
T ranges from 0 to 1
T=0 when nation only imports or exports the good
T=1 when exports = imports.
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|X - M|
T=1- X+M
In 2010, US exported 170 million and 1.9 billion
raw sugar cane
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
|.17 – 1.9|
T = 1 - .17 + 1.9 =.164
In 2010, US exported 170 million and 1.9 billion
raw sugar cane
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|1 – 1.2|
T = 1 - 1 + 1.2 =.909
In 2010, US exported 170 million and 1.9 billion
raw sugar cane
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Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Transportation costs
Transport, or logistics, costs are the freight
charges, warehousing costs, costs of loading and
unloading, insurance premiums, and interest
charges incurred while goods are in transit
between nations.
Homogeneous goods will be trade internationally
only if the pretrade price difference exceeds
transport costs.
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Transportation costs
Nontraded goods and services are goods for
which transport costs exceed price differences
across nations.
Examples:
Cement is not traded internationally because of its
high weight-to-value ratio.
Average people do not travel from New York to
London for a haircut.
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Environmental standards
Refers to levels of air, water and thermal
pollution resulting from garbage disposal that
a nation allows.
A nation with lower environmental standards
can use the environment as a resource
endowment, achieving comparative
advantage in polluting goods and services.
Salvatore: International Economics, 10th Edition © 2010 John Wiley & Sons, Inc.
Appendix to Chapter 6
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