...The Ricardian model is a simple picture of international trade between nations, which was created to show comparative advantage in producing goods and the gain from trade. The concept of comparative advantage was introduced by David Ricardo in 19th century. The country has comparative advantage in producing certain product if it can produce it at a lower cost than any other country. The Ricardian model has been developed on following assumptions: * Only two countries are involved in activities; * Only two goods can be produced; * Labor is the only factor of production. The Ricardian model is a useful key for economy, because it explains why trade between countries can happen and how it will effect national welfare (Krugman, 2012). Countries should export a product in which they are most productive to fulfill the prediction of the Ricardian model. The principal of the model is defined by specialization, meaning countries specialize in goods they export. This will not hold in the data. However, the prediction that countries tend to export those goods they have high labor productivity is confirmed in data. Since 1950s, there has been a few attempts to empirically test the validity of the comparative advantage theory. McDougall, Stern, and Balassa have claimed that they found confirmation for the model by using the data from World War II. However, later researches have criticized this model, and fallacies have been found (“International Trade Relations”, 2014). ...
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...Chapter 2: Labor Productivity and Comparative Advantage - The Ricardian Model Explanations: Opportunity cost; comparative advantage; Parper labor argument; derived demand; Gains from trade; absolute advantage; Unit labor requirement; nontraded goods. Multiple Choice Questions 1. Countries trade with each other because they are _______ and because of ______. A. different, costs B. similar, scale economies C. different, scale economies D. similar, costs E. None of the above. 2. Trade between two countries can benefit both countries if A. each country exports that good in which it has a comparative advantage. B. each country enjoys superior terms of trade. C. each country has a more elastic demand for the imported goods. D. each country has a more elastic supply for the supplied goods. E. Both C and D. 3. The Ricardian theory of comparative advantage states that a country has a comparative advantage in widgets if A. output per worker of widgets is higher in that country. B. that country's exchange rate is low. C. wage rates in that country are high. D. the output per worker of widgets as compared to the output of some other product is higher in that country. E. Both B and C. 4. In order to know whether a country has a comparative advantage in the...
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...International Economics IB2013b/IB2013c Final Exam (90 mins) MULTIPLE CHOICE QUETIONS (circle the correct answers) 1. The term "gains from trade" describes: a. Producer surplus. b. The fact that when two countries trade, both are better off. c. Profits made by businessmen involved in international trade. d. Consumer surplus. e. The income of middlemen in a transaction. 2. In its most basic form, the gravity model says that the most important factors that describe the amount of trade between countries are a. differences in the amount of workers and physical capital between countries. b. differences in wages and technology between countries. c. the cultural affinity between the countries and the existence or lack of a common language. d. the tariff barriers between the countries and the costs of transportation. e. the amount that the countries produce and the distance between them 3. Evidence shows that f. the amount of trade that a country undertakes is not related to the number of multinational corporations in that country. g. the amount of trade that a country undertakes is not related to its geography. h. the effect of borders is not important when comparing international trade with trade between regions within a country. i. the amount of trade between countries is not related to the cultural affinity between the countries. j. countries farther apart have less trade between them on average. 4. In contrast to 50 years...
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...to export as much as it likes, the wages of our workers will be forced down to the same level. You can’t import a £8 shirt without importing the 50 pence wage that goes it.” International trade is exchange of capital, goods, and services across international borders or territories, however we use the Ricardian model to provide the simplest description of comparative advantage, and the advantages of trade in a balanced setting. Comparative advantage describes the advantage the country has in the production of a commodity if the ratio is between its pre trade marginal costs of that commodity and its pre trade marginal cost of producing the other commodity is lower than that of its trading partner. When we talk about comparative advantage we must think of the pattern of trade, which explains how each country will specialise and export the goods, in which it has a comparative advantage, and import the goods which it doesn’t have the comparative advantage. This will only be possible if free trade is allowed. Also if a country exports its specialised goods they will gain rather than failing at producing goods that they don’t have comparative advantage in. Lastly every country will have some specialist good in which they will have the comparative advantage, therefore every country can gain by free trade. However, non-economists believe that a developing country will have an advantage over richer countries as the labour is a fraction of the cost. There are two possible outcomes...
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...Take Home Exam International Business RSM5007 This Exam is due on March 5, 2012 This Exam is to be done individually Question 1. You are asked to write a 1,000 word brief to be submitted to the European Commission on the Rise of China. There is a debate as to whether the EU commission should move to limit (to the extent it can) the rise of China. You are asked to write a brief that would highlight the opportunities created for the European economies by the rise of the China, and the challenges. You must conclude with your opinion on a way forward for the EU Commission as it relates to its China Policy. Include a Word Count. Question 2. Suppose you are approached by RIM to help them develop a strategy to enhance their penetration of the China and India markets (ie. to access the market itself, and not simply as an export platform). As noted in class, there are several alternative entry strategies: Don’t do it Sell to a home country exporting agent or a foreign country importing agent Contract with a foreign country importing agent Establish a foreign subsidiary that imports and distributes License production to a foreign manufacturer who distributes Establish a foreign subsidiary, either via acquisition or greenfield investment, that manufactures and distributes How would you advise RIM? It must be noted that the Chinese government forces foreign firms to share technology with local partners. Refer to the following two papers in your response: Distance Still Matters by...
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...as growth was dependant on the hoarding of finite materials, a country’s gain was always translated by another’s loss. As it may be perceived this was a system that encouraged the prevalence of trade disputes and war between nations instead of peaceful cooperation between them. In 1776 an English academic and philosopher published a book that broke through will all economic assumptions held to be true at the time, and advocated for a completely different system. His name was Adam Smith and his work became known as “An Inquiry into the Nature and Causes of the Wealth of Nations”. Adam Smith began by disproving the mercantilistic notion of trade protectionism where exports were maximised in detriment of heavy restrictions on imports. According to Smith, international trade could in fact be beneficial to all participants if each country would specialise in the production of goods where it had an absolute advantage in terms of costs. By producing a good cheaper than everyone else and by importing others, a country could immensely gain from international trade. Although revolutionary, Smith’s theory of absolute advantages was not free from flaws. In fact if a country didn't have such advantage in producing a given good it wouldn't have access to trade, or in another words, trade wouldn't occur if country A couldn't be the most efficient in producing good B. In this context and in attempt to improve Smiths’ theory, David Ricardo a British political economist of Portuguese...
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...homepage: www.elsevier.com/locate/sced Uncertainty, trade integration and the optimal level of protection in a Ricardian model with a continuum of goods Michele Di Maio ∗ Department of Economic Studies, University of Naples “Parthenope”, via Medina 40, Naples, Italy a r t i c l e i n f o Article history: Received 13 November 2006 Received in revised form 1 April 2008 Accepted 15 July 2008 Available online 3 August 2008 JEL Classification: F01 Keywords: Uncertainty Trade integration Optimal protection Specialization Continuum of goods a b s t r a c t This paper analyzes the effects of increasing trade integration on individual utility when the international specialization pattern is stochastic, i.e. when the range of goods each country produces depends on the realization of a random variable. Using a Ricardian continuum of goods model it is shown that under uncertainty a trade-off emerges. As in the standard deterministic model, higher trade integration reduces prices and increases expected real income. However, higher trade integration, reducing the number of active sectors in the economy, also increases the displacement cost the worker suffers when the sector she is employed into has to close down because, ex-post, the foreign country’s competing sector results to be more efficient. Two are the main results of the model. First, it is shown that, under uncertainty and job specificity, increasing trade integration is not always welfare enhancing. Second...
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...Economics for the Global Manager BUS610 AIU Economics for the Global Manager The Heckscher-Ohlin theory explains that countries trade goods and services with each other because the countries vary in the accessibility of the factors of production such as more machines than workers or more workers than machines. A country will specialize in the production of goods for which it is fitting to produce. According to the theory, a higher standard-of-living will occur in the countries who participate (Why Trade, 2013). The Ricardian Theory, also known as the theory of comparative advantage, dominates the theory of international trade. The theory forms the basis of the claim that free trade operates to the advantage of every nation. It was built on the basis of the concept of labor value (Ricardo’s Theory, 2013). While the Ricardian model is simple, it assumes labor as a factor to production. The Heckscher-Olin model is more realistic because it considers two factors of production—capital and labor. Capital cannot move from country to country but is mobile across national borders, according to the Heckscher-Olin model, which is key to many results. With a world that has significant capital mobility, the Ricardian theory of trade is more useful than Hackscher-Olin (Mankiw, 2007). Despite that the US has an great quantity of capital, the exports are labor intensive while imports were capital intensive, according to Leontief. America has a superior economic organization and...
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...L Karp International Trade October 20, 2005 1 Ricardian model The Ricardian model provides the simplest setting to illustrate comparative advantage and the gains from trade in a general equilibrium setting. I will use a simple example to discuss the Ricardian model. Two countries, Canada and the US produce two commodities, corn and umbrellas. (The obvious alliteration is used as a mnemonic device.) Definition of comparative advantage: A country (e.g. Canada) has a comparative advantage in the production of a commodity (e.g. corn) if the ratio between it’s pre-trade marginal costs of that commodity (corn), and its pre-trade marginal cost of producing “the other” commodity (umbrellas) is lower than that of its trading partner. 1.1 Technology and markets The Ricardian model assumes that production uses only 1 input (labor), with constant returns to scale. This assumption means that the technology in each country and each sector is entirely determined by the labor requirement per unit of output. The other assumptions are that (a) labor moves freely between sectors within a country, but (b) labor cannot move between countries. Assumption (a) implies that in a particular country, the wage must be the same in both sectors; assumption (b) means that the wage need not be the same (and typically is not the same) in the two countries. In addition, all agents are price takers, i.e. there is perfect competition. In my example, the unit labor requirements are unit labor requirement Corn...
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...crisis in 2007-2008 fiscal years the freight market remained volatile and freight rate remained low in various market segments. The purpose of the study to determine the factors those influence the freight rate and how those influence the demand of port services and setting charges for the port. The depression in market segments affects the supply and demand of the freight of the shipping lines which also has an effect on the demand of port services and setting of port charges and tariffs. The research paper shows the factors that influence the freight rate as well as the influence on the port services and setting charges and tariffs which lead to a change in port operation, reform and regulation. To illustrate the relation among them international trade theory and other historical data has been considered as the evaluations of the paper. In the discussion of different market segments new demands for the port operation and setting charges has been illustrated. Fundamental concepts on port pricing, freight rate and services introduced by the previous research on this topic has been considered as a source of information for the research findings. The conclusion of the ongoing paper consists some of the new concepts on regard of the port services demand and charges occur from the market volatility and low freight has been mentioned as a general interpretation of the...
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...all nations to become rich simultaneously by following mercantilist prescriptions because the export of one nation is another nation’s import. However, all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Table I, illustrating Smith’s concept of absolute advantage, shows quantities of wheat and cloth produced by one hour’s work in two countries, the United States and the United Kingdom. Division of labor and specialization occupy a central place in Smith’s writing. Table I indicates what the international division of labor should be, as the United States has an absolute advantage in wheat and the U.K. has an absolute advantage in cloth. Smith’s absolute advantage is determined by a simple comparison of labor productivities across countries. Smith’s theory of absolute advantage predicts that the United States will produce only wheat (W) and the U.K. will produce only cloth (C). Both nations would gain if they have unrestricted trade in wheat and cloth. If they trade 6W for 6C, then the gain of the United States is 1/2 hour’s work, which is required Absolute advantage U.S. Wheat (bushel/hour) Cloth (yards/hour) 6 4 U.K. 1 5 Table 1 to produce the extra 2C that it is getting through trade with the U.K. Because the U.K. stops wheat...
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...Inter-American Development Bank, 2010 www.iadb.org Documents published in the IDB working paper series are of the highest academic and editorial quality. All have been peer reviewed by recognized experts in their field and professionally edited. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied. This paper may be freely reproduced provided credit is given to the Inter-American Development Bank. Abstract* This paper analyzes the macroeconomic impact of China’s 2009-2010 fiscal stimulus package by simulating a dynamic general equilibrium multi-country model of the world economy, showing that the effects on China’s economic activity are sizeable: absent fiscal stimulus China’s GDP would be 2.6 and 0.6 percentage points lower in 2009 and 2010,...
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...Journal of Finance and Economics, 2014, Vol. 2, No. 3, 58-59 Available online at http://pubs.sciepub.com/jfe/2/3 © Science and Education Publishing DOI:10.12691/jfe-2-3 Rethinking Multinational Enterprises’ Capital Budgeting in the Globalized New Millennium Fabio Pizzutilo* Department of Business and law studies, University of Bari *Corresponding author: fabio.pizzutilo@uniba.it A strict interpretation of the Ricardian assumptions on international trade leads to a conclusion in favour of the impossibility of a firm investing abroad. Even extending the Ricardian model by including capital among the factors of production, it has to be supposed that, from a purely economic and financial perspective, the choice between directly investing abroad and not doing so is totally indifferent. It is the existence of imperfections in the real and/or financial markets that give rise to the convenience for a firm to exploit its competitive advantages through foreign direct investment (FDI). In a broad sense, a multinational enterprise (MNE) can be intended as a company that holds controlled firms, producing branches, divisions, establishments, subsidiaries, etc., in a foreign country. The reasons that can persuade a firm to become multinational are manifold. First of all, it can be the sole action in order to conduct a specific business. Think about the activity of the extraction of raw materials: it cannot be conducted anywhere other than the mine’s location. Many firms are seeking greater...
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...ŞULE ÖZLER, UCLA ECONOMICS DEPARTMENT BUCHE HALL 9361 OZLER@ECON.UCLA.EDU OFFICE HOURS: TUE & THR 1:00-1:45 AND BY APPOINTMENT ONLY FALL 2011 ECONOMICS 121- INTERNATIONAL TRADE THEORY Course Description In this course we will study alternative models of international trade. We will examine gains from trade, income distribution impact of international trade. We will also examine issues of protectionism and commercial policy in developing as well as industrialized countries. This is a theory course; it does not cover case studies beyond the many examples provided in the book. Required textbook International Economics by Krugman, Obstfeld, AND Melistz, 9th edition. Lecture notes Lecture notes will be posted on the web. Study questions Each chapter provides plenty of study questions. Their answers cannot be posted on the web due to lack of permission from the publisher. However, I will discuss the pertinent ones during the lectures. I will also be posting the previous exams (with their answers) from the two previous quarters. Otherwise, I don’t have an exam bank. Exams There will be two exams. The weights and the times of the exams are as follows: Midterm Exam (%45): November 1, during the lecture hour, in the rooms to be announced later. Final Exam (%55): December 6, 9-11 am (note that it is a two hour exam), in a room to be announced later. I will be providing you with a letter grade distribution after the midterm. The course grades will be assigned based on your course score...
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...reserves of copper ore or bauxite. We can see that in terms of the production of goods, there are obvious gains from specialization and trade, if Zambia produces copper and exports it to those countries that specialize in the production of other goods or services. It is easy to see that if countries have an absolute advantage there are advantages to trade. However, what happens if one country has an absolute advantage over its trading partners in the production of a number of goods. Specialization and trade can still result in there being welfare gains made from trade. A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. The opportunity cost of a good is the quantity of other goods sacrificed to make another unit of that good. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing anything, relative to their trading partners. The theory of comparative costs argues that, put simply, it is better for a country that is inefficient at producing a good or service to specialize in the production of that good it is least inefficient at, compared with producing other goods. The modern version of the Ricardian model and its results are...
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