Lecture 4

Sources of comparative advantage

-larger firms dominating digital markets in EU--> imperfect competition

 

The Heckscher-Ohlin Model

-Factors proportions model

-Comparative advantage determined by factor endownments: production facotrs--> some countries focused on one individual factor--> China cheap Labour, other... cheap land...

-Factor intensities: Agriculture--> requiring land= land intensive--> requiring cheap labour=labour intensive, need finding cheap labour --> requiring capital

-Two differences drive trade in H-o model

Countries differ in endownments of factors

-labour,capital,land,skill (human capital).... resources

2. Industries differ in factor intensities

 

-Countries export good that use abundant factors

Intuitition

--abundant factors are cheap (in Autarky=closed markets)

--> factors are perfectly mobile within a country accross industires, same resource can be used in energyu production or car manufacturing

 

Effects of Trade

according to H-O theory

Trade causes: Improts decrease, exports grow--> Factors to move industires--> towards export sector

 

For factor prized: Price equalization, China labour prices increase,>USA decrease

Pareto efficient outcome: Thinking about also what happens to the ones left outside of welfare.

Monopoly-one seller Oligopoly- few selles Monopolistic competition- many sellers but each with some market power

Oligopoly

-in many international markets

 

 

The new trade theory

-Subsidies making each contributor coming to the markets, even though would be negative profit without subsidies

 

----> Boeing and Airbus example

---> Boeing goes to USA government, Airbus enters markets as a result of subsidies

---> USA gov subsidizes Boeing

---> Case taken to WTO court

 

Tariffs

Ad valorem: % of value

Specific: Dollars per unit