International Economics Part 3

1. International EconomicsPart 3 Dr. Stefan Kooths BiTS Berlin(winter term 2013/2014) www.kooths.de/bits-ie

2. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • General analysis of cross-border trade • Reasons for inter-industry trade:Absolute and comparative advantage • Causes and consequences of cost differences:The role of factor endowments and factor proportions • “Imperfect” competition and intra-industry trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

3. Factor proportions and factor endowments • Factor proportions • Factor intensity used in production of goods • Labor-intensive good:Ratio of labor to other factors is high relative to other goods(share of labor costs is high relative to other goods) • Factor endowments • Available factor resources within a country • Labor-abundant country: Ratio of labor to other factors is high relative to the rest of the world

4. Shares of the world‘s factor endowments (2007/2010)

5. The Heckscher-Ohlin theory and income distribution • Two countries, two factors, two goods (2-2-2 model) • Fixed and fully employed factor supplies • Mobile between sectors within each country • Immobile between countries • Same consumption patters in both countries • Same (constant-return-to-scale) production technologies in both countries Trade explanation by H-O • Differences across countries in the relative availability of factors • Differences across products in the use of these factors • A country exports products that use its relatively abundant factor(s) intensively and imports products that use its relatively scarce factors intensively

6. Short-run and long-run effects:National losers and winners (1/2)

7. Short-run and long-run effects:National losers and winners (2/2)

8. The Stolper-Samuelson theorem and factor price equalization

9. The Rybczynski-theorem

10. The Leontief-paradox and empirical evidence

11. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • General analysis of cross-border trade • Reasons for inter-industry trade:Absolute and comparative advantage • Causes and consequences of cost differences:The role of factor endowments and factor proportions • “Imperfect” competition and intra-industry trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

12. Intra-industry trade (overview) • Intra-industry trade • Exports and imports in the same product category • Main drivers and explanations • Product differentiation (monopolistic competition) • Substantial internal scale economies (global oligopolies) • External scale economies (regional spill-overs, industry clusters)

13. Measuring intra-industry trade • United States, selected products (2009) • Average percentage IIT-shares in non-food manufactured products

14. Internal and external scale economiesand complete specialization

15. Monopolistic competition • Preferences for variety and product differentiation • Some internal scale economies (decreasing average cost) • Easy market entry and exit in the long run • Mild form of “imperfect” competition

16. Global oligopolies • Substantial internal scale economies (few large firms) • Path-dependency for firm locations • Oligopoly pricing (interdependence, game theory) • Stronger form of “imperfect” competition

17. External scale economies: Industry clusters • Spill-overs and regional clusters:Size of the entire industry in one location matters • Home market • Path-dependency, luck • Government interventions

18. Summary: Gains and losses from international trade