KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 1

International EconomicsPart 3

Dr. Stefan KoothsBiTS Berlin

(winter term 2013/2014)www.kooths.de/bits-ie

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 2

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. 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

4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open

Macroeconomy6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 4

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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 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 countriesTrade explanation by H-O

» Differences across countries in the relative availability of factors» Differences across products in the use of these factorsA country exports products that use its relatively abundant factor(s)

intensively and imports products that use its relatively scarce factors intensively

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 6

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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 7

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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 8

The Stolper-Samuelson theorem and factor price equalization

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 9

The Rybczynski-theorem

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 10

The Leontief-paradox and empirical evidence

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 11

Outline

1. Introduction and Overview2. Systemizing and Recording Cross-border

Economic Activity3. 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

4. Trade Policy: Free Trade vs. Protectionism5. Foreign Exchange Markets and the Open

Macroeconomy6. Case Study: The Euro Area Crisis7. Summary: The Key Lessons Learnt

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 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)

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 13

Measuring intra-industry trade

United States, selected products (2009)

Average percentage IIT-shares in non-food manufactured products

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 14

Internal and external scale economiesand complete specialization

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 15

Monopolistic competition

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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 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

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 3 18

Summary: Gains and losses from international trade