I. International Capital Mobility a. Why international capital flows ? (i) Capital flows as a counterpart of the exchange of goods (see point b) Trade balance = Net capital outflows Exchange of goods results from differences across countries: productivity, endowments, time preference.
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- raw materials: gold, oil…
- exchange rate: relative price of one good between two countries
(i) Static analysis: some aspects of international trade (differences in productivity, in endowments)
(ii) Dynamic analysis: intertemporal choice
-> Countries have an advantage to exchange when there exists a gap between prices in the AE and the TE.
-> why countries benefit from international trade?
->what are the consequences of international trade on prices?
-> Because countries are different
-> International trade leads to a price convergence
(i-a) the Ricardian model
(i-b) the Factor Specific model
(i-c) the Hecksher Olhin model
aLCQC + aLWQW = L (2-1)
QC + 2QW = 120
Absolute value of slope equals
opportunity cost of cheese in
terms of wine
in poundsFigure 2-1: Home’s Production Possibility Frontier
A One-Factor Economy
of wine, Q*W
of wine, QW
of cheese, QC
of cheese, Q*CFigure 2-4: Trade Expands Consumption Possibilities
Trade in a One-Factor World
Table 2-2: Unit Labor Requirements
Prices in AE
To simplify, consider that the demand for each good is the same in the two countries but countries have different endowments in inputs: TA>TJ, KJ>KA
PM/PF is higher in Canada
I. International capital mobility
b. The reasons of exchange: some aspects of international trade and intertemporal choice
c. Recent evolutions of financial integration
d. The Balance of Payments
->International exchange of capital
Intertemporal production frontier
At point A, the country produces only at the first period and investment is zero.
Since Home country production is biased towards present, price of present consumption will be lower in Home country than in Foreign country.
Both Isovalue line and IBC: