week 5 Flashcards
what are the expectations of world trade according to traditional theory
perfectly competitve trade models predict that international trade is caused by differences between countries which create a pattern of CA
what is world trade like according to statisitics?
there is a lot of disporportionate trade.
concentrated within blocs of rich countries
there should be large flows from the north (rich) to south (poor) cpountries
what type of models can explain intra-industry trade between soimilar northen countries
models of trade under imperfect competition
2 way trade within an industry
- with monopolistic markets, 2 way trade is profitable at the industry level and welfare improving
what are the 2 observations on trade/GDP ratios
- negative correlation: large contries tend to have low GDP/ trade ratios
- V high (>100%) trade/GDP ratios with the top countries –>
when there is a negative correlation to GDP and trade, what does this mean
you can infer trade policy stance from the relationship alone
what does vertical fragmentation means
creates international trade in components, where specific countries produce certain parts.
China providing labor and cotton whilst Saudia arabia providing the oil to produce a barbie fdoll
what does RM and HOS focus on in terms of intermediary or final goods
RM and HOS focuses on final goods:
• Factors (goods and capital) produces a final good
• They don’t consider the production of intermediate goods
• A lot of international trade occurs in components
how can HOS be used to explainveritcal Fragmentation
HOS can be used to understand the difference the stages are located
• China is the place of assembly
• Labour-intensive activity in a labour abundance country
what is the real life evidence of vertical fragmentation from WTO
WTO,1998: The American Car
• 30% of the cars value goes to Korea for assembly labour intensive country
• Only 37% of production value is generated in the United states
how is the HOS theorem tested, what were the results
by looking at real-life data:
in 1947, we found that the USA exported a lot of capital goods despite being capital abundant.
the results are that HOS crumbled, there were importing a lot of capital.
what is the leontief paradox
Leontief paradox:
• US imports were capital intensive
• Contradicts the HOS theorem
Capital abundant countries will import capital intensive goods
what is 1 explanation if the Leontief paradox
Obvious explanation: assumptions of HOS Theorem violated
• Its too simple
• However, it’s simple because that’s the major point of modelling real life
How would these assumptions need to be violated to account for Leontief finds
- USA and ROW use the same tech.
- Identical consumer preferences in USA & ROW
- World is in FT equilibrium in balanced trade
- Country would export one good and import the other
- Factor of production too highly aggregated
- Perfect competition
• USA has a strong Ricardian CA due to superior technology in L-intensive goods offsets USA HOS CA in K intensive goods
• Preference of US consumer are biased towards K-intensive goods USA therefore tends to import
• WW2 ended in 1945, but world not in equ in 1947 USA had a trade surplus exporting both goods (could be?)
• USA skilled labour-abundant Overlooked
• Imperfect comp: international trade no based on CA Reciprocal entry alone
c x
what is Feenstra & Taylor’s Reworking of 1947 Data all about
its about labour productivity why does the USA a more effective work force relative to the rest of the world
how do you calculate the effective work force
Effective labour force = n of workers*average labour productivity
