Trade

Why does trade occur? Suppose labor required per unit of following products for india and U.S is:

INDIA U.S.

SILK

PCs

5 20

15 5

WHICH COUNTRY HAS ABSOLUTE ADVANTAGE IN PRODUCTION?

IF TOTAL LABOR EMPLOYED IN PRODUCTION IS:

SILK

PCs

INDIA

180

40

U.S.

120

60

WHAT WILL BE THE TOTAL OUTPUT? WHAT IF ALL LABOR IS SHIFTED TO AREA OF ABSOLUTE ADVANTAGE? WHAT DOES IT SHOW?

“If a country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” It is the maxim of every prudent master of the family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes but buys them from shoemaker. What is prudence in conduct of every family can scarce be folly in that of a great kingdom.”

READ THE CASE GIVEN WHAT DOES THIS SHOW?

Suppose labor required per unit of following products for india and U.S is:

INDIA U.S.

SILK

PCs

10

20

5

15

WHAT DOES IT SHOW?

IF TOTAL LABOUR EMPLOYED IS:

INDIA U.S.

SILK

PCs

180 120

40 60

WHAT WILL BE THE TOTAL OUTPUT? IF ALL LABOR IS SHIFTED TO AREA OF SPECIALIZATION WHAT THE NEW OUTPUT?

THERE ARE TWO COUNTRIES INDIA AND US,WHAT WILL BE THE MAJOR FACTOR OF PRODUCTION IN THESE? WHAT WILL HAPPEN TO PRICES OF SPECIALIZED AND NONSPECIALIZED PRODUCTS IF THEY DO NOT TRADE? TRADE? HECKSHER OHLIN THEORM: It says that a capital-abundant country will export capital-intensive good while a labor-intensive country will export labor-intensive good. Once trade is allowed between the two countries, profit seeking firms will move their products to the markets that have relatively higher price. Thus capital abundant country will export capital-intensive good while labor intensive will export labor-intensive good. Trade flows will rise till the prices of both goods are equalized in the two markets.

WHAT WILL BE THE CHANGE IN PRICES OF FACTORS OF PRODUCTION:LABOR AND CAPITAL IN THESE COUNTRIES? The Stopper Samuelson model: It states that if the price of capital intensive good rises then the price of capital, the factor used intensively in that industry will rise, while the wage rate of labor will fall. Similarly if the price of labor intensive good were to rise then the wage rate of labor will rise and rental rate would fall. This further has a magnification effect in case the nations open to free trade. In case of free trade the real return of a country’s abundant factor would rise while that of relatively scarce factor will fall.

IF FREE TRADE OCCURS WHAT WILL HAPPEN TO WAGE RATES ACROSS LABOR INTENSIVE AND RENTALS ACROSS CAPITAL INTENSIVE COUNTRIES?

Factor-Price Equalization model: This theorem says that when prices of the output goods are equalized between countries, as when they move to free trade, then the prices of factors (capital and labor) will also be equalized between these countries. AS MRP = MP*Price

HOW WILL TRADE AFFECT ISSUES SUCH AS INVESTMENT, POPULATION GROWTH AND HENCE LABOR FORCE GROWTH, IMMIGRATION, EMIGRATION ETC.?

The Rybczynski Theorem: This theorem states that; an increase in country’s endowment of a factor will cause an increase in output of the good which uses that factor intensively, and a decrease in output of the other good; this will lead the direction for Investment, population growth and hence labor force growth, immigration, emigration etc.

Leontiff paradox

WHAT AFFECTS EXCHANGE RATES? Anything which affects prices of commodities also affects prices of currencies What is it? DEMAND AND SUPPLY WHAT CAN AFFECT DEMAND AND SUPPLY? INFLATION INTEREST RATES BOP MONETARY POLICY EXPECTATIONS.

APPERECIATION/DEPRECIATION OF A CURRENCY Suppose one pound is of Rs.80 in period 0 and becomes Rs. 85 in period 1. what is the percentage appreciation/depreciation in rupee and pound. During 2002 yen went from $0.007404 to $0.0084746. By how much did the yen appreciate against the dollar? By how much did the dollar depreciate against yen? On july 2,1997, the thai baht fell 17% against U.S. dollar. By how much has the dollar appreciated against baht? April 1,1998,was an ill-fated date in yugoslavia. On the day, the govt. devalued Yugoslav dinar , setting its new rate at 10.92 dinar from 6.0 dinar previously. By how much has the dinar depreciated against dollar? By how much has the dollar devalued against the dinar?