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Chapter 2 - 1

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vynxh23413e
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Chapter 2

Modern international trade theory


M.s. Ngo Quynh Trang
Aims
Bringing international trade closer to reality.

– Providing additional evidence to assert the superiority of free


trade.

– Continuing to discover the reasons behind the emergence of

Outline trade

– International trade in the context of increasing OC

– Trade based on differences in consumer preferences

– Heckscher-Ohlin model
– H-O-S factor-price equalization theory

–
– The opportunity cost of a product increases with the scale of
production. This means that a country has to sacrifice an
increasing amount of one product to produce each additional
unit of another product.
Definition –
– Example:
- Reducing the production of the first 2 kilograms of wheat
results in an additional production of 1 meter of fabric.
- To produce an additional half meter of fabric, a reduction of
3 kilograms of wheat is required.
–
– Scarce resources : PPF curves slope
OC luôn tăng vì nguồn lực là hữu hạn

– Each product is suitable for a specific resource. –

Reasons Example:

Rice
Sugar-cain

– With increasing OC, the PPF is a concave (lõm) curve that


slopes toward the origin.

– The OC of a product at a point on the PPF = the slope of the


Key points tangent line ( đường tiếp tuyến) to the PPF at that point
relative to the axis (trục) representing that product.
– The Marginal Rate of Transformation (MRT) ‘tỉ lệ chuyển đổi
biên’ dung cho supply side represents the OC of a product

– Tangent line = slope


Example
OCx(A) = MRTX(A) = 1/4 OCY(A) = MRTY(A) = 4
OCx(B) = MRTX(B) =1 OCY(A) = MRTY(A) =1
Indifferent
curve

A khác B vì có đường giới hạn ngân sách (budget constraint)


– The indifference curve is convex (lồi) towards the origin.
– The Marginal Rate of Substitution (MRS) ‘tỉ lệ thay thế
biên’ at a consumer point equals the slope of the tangent line
to the indifference curve at that point relative to the axis
representing that product.
– Using the indifference curve to explain consumer
preferences without the need for specific
Without trade numerical data."
Indifferent Y Y

curve
X1 X2

(Px/Py
PA = OCx(A)= )(
A) =1y/4x x=1/4y
(Px/Py
PB = OCx(B)= )( =1
B)
!# !#
! " ! "
We have: PA = (! # ) < PB = ( ! # )

ØCountry A has a Comparative Advantage in product X, so


it exports X and imports Y.
Without trade ØCountry B has a Comparative Advantage in product Y, so
it exports Y and imports X.
• PA and PB are referred to as domestic equilibrium prices for
products.

• If PA is different from PB, then trade occurs


The basis of trade is domestic equilibrium
prices of products
§ 2 countries, 2 products Y
Country A
§ Country A is smaller compared to
Country B - the world 60 A
IC1
§ World comparative price of
Example product X: (Px/Py)w = Pw PA = 1/4
=1
§ Trading volume: 60X = 60 0
X
Y 50
!" !" !# !#

PA= ( ) = ¼ < Pw = ( ) = 1
⇒Country A has a comparative advantage in X, so it exports X
and imports Y.
Example ⇒The world has a comparative advantage in Y, so it exports Y
and imports X
Example
– Country A specializes in the production of X and trades with
the world for Y.

– Starting from point A, production moves downward, and OC


of product X increases.

– Specialization occurs until the domestic price of product X


Example in Country A equals Price in country B = Pw = 1.

– The new production point in Country A is B(130X; 20Y).


Country A exports X and imports Y at the world price Pw =
1.
– Country A exports 60X and imports 60Y at the price Pw = 1.

– After engaging in trade, Country A consumes at point


E(70X; 80Y).

– The Country A's indifference curve BQ3 at this point is


tangent to the line of trade.
Example
– Consumer point E on BQ2 is higher than BQ1, indicating
that consumers benefit from international trade.

– Output: B (130X; 20Y)

– With trade: (–60X; +60Y)


– Consumption (with trade): E (70X; 80Y)

– Consumption (without trade): A (50X; 60Y)

– Gains: (+20X; +20Y)

Example
Gains from Exchange Gains from specialization
Example
Example

– Let's assume that Country A opens up to trade but does not


specialize in production, still producing at A(50X, 60Y).
– Suppose Country A exports 20X in exchange for 20Y (Pw =
1).

– The consumption point after trade is T(30X, 80Y).


– Country A increases its welfare because indifference curve IC2
passing through point T is higher than IC1 passing through point
Example A.

– In terms of quantity,

+ Comparing point T to point A, Country A changes (-20X, +20Y).


However, (Py/Px)Country A = 4.
+ If domestically supplied, it would require -80X to exchange for 20Y.

+ Through trade: only -20X is needed to exchange for 20X.

+ Country A still benefits from trade.


0 10 30 50 70 90 110 130 X

Example

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