Summary of Chapter 3

1. The single most important determinant of trade patterns is the opportunity

cost of traded goods. A country is said to have a comparative advantage in

producing a good if it experiences a lower opportunity cost (in terms of the

other good foregone).

2. Countries that are producing according to their comparative advantage are

maximizing the benefits they receive from trade and their national welfare.

3. On the other hand, a country is said to have absolute advantage in

producing a good if using the same amount of input, the country can

produce more of that good than the other good.

4. If a country like Vietnam is producing according to its comparative

advantage and exporting to US, then it is fallacious to say that workers in

Vietnam are paid less than in US. In Vietnam, workers (for the same job)

are paid lower because the value of what the workers produce in one hour

is lower than what workers in US will produce (differences in education,

training, access to machinery etc.). In this case, workers in each country

are still getting paid according to their relative productivities.

Summary of Chapter 4

1. The Heckshcher-Ohlin (HO) model of trade hypothesizes that different

countries’ comparative advantage is based on differences in factor

endowments. Countries end up exporting goods that more intensively uses

the nation’s relatively more abundant factor. And import goods that

intensively use the nation’s scarce resources.

2. HO model has implications for the income distribution effects of trade.

Opening to international trade causes employment to rise in the more

abundant factor and employment the less abundant factor suffers.

Consequently incomes/rent earned by the more abundant sector rises, and

those earned by the scarce sector decreases. Stopler Samuelson theorem

describes these effects.

3. In the specific factors model, some factors are assumed to be fixed (not

mobile, e.g. land). Consequently, when trade expands the production of a

good, the specific factor used to produce it experiences a rise in demand

for its use, and so, income of this factor increases. The specific factor used

to produce the imported good experiences a fall in demand and thus, its

income falls.
4. Two of the most popular alternative trade theories are the product life

cycle and the theory of intra-firm trade. The product life cycle focuses on

the development of technological change and the life history of many

manufactured goods periods of innovation, stabilization, and

standardization. The theory for intra-firm trade allows a role for

comparative advantage but also has industrial organization elements. It is

impossible to state a general rule about the theory of intra-firm trade.

5. Offshoring is the movement of some or all a firm’s activities to another

country. Outsourcing is the reassignment of activities to another firm. In

either a domestic or foreign location.

6. International migration can alter a country’s comparative advantage,

although the number of migrant workers a country receives is not enough

to make long-run changes.

7. In the medium to long run, trade has little or no effect on the total number

of jobs in a country. The abundance or scarcity of jobs is the function of a

country’s labour market policies, incentives to work, and the

macroeconomic policies.

There is no consensus among economists about the impact of trade on

wages