Lecture 07 - webnotes - Introduction The composition of...

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Lecture 7: Globalization & international trade Introduction The composition of trade The dimensions of trade
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Introduction By now, probably familiar with the trend in international trade over the past 200 years. That is, trade went up…and by a lot. What is striking, though, is the apparent regularity of the growth. (What governs this pattern?)
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Introduction Exports for 18 countries (millions of 1990 USD), 1800-2000 0 500000 1000000 1500000 2000000 2500000 3000000 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
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Introduction Exports for 18 countries (millions of 1990 USD), 1800-2000 1 10 100 1000 10000 100000 1000000 10000000 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
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Introduction Remaining questions for this week: 1.) What determines the composition of trade (or who trades what)? 2.) What determines the dimension of trade (or what explains the volume of trade)?
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The composition of trade We’ve already considered one approach to explaining the composition of trade. The Heckscher-Ohlin (HO) model was used by O’Rourke and Williamson to explain the Great Specialization.
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The composition of trade A recap on HO: critical assumptions 1.) Endowments of factors of production assumed to be different and factor intensity assumed to be different. 2.) Identical technologies across countries.
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The composition of trade A recap on HO: critical implications 1.) Stolper-Samuelson Theorem: an increase in the relative price of a good will increase the real return to the factor used intensively in the production of that good. 2.) Factor price equalization: free trade will
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The composition of trade A recap on HO: the historical application The 1800s saw trade costs fall (commodity price convergence) and trade boom. HO predicts that the UK will have exported manufacturers and NA will have exported agricultural goods. To a first approximation, this seems correct.
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The composition of trade A recap on HO: the historical application And what about relative factor returns? In the UK, the formerly scarce factor (land) suffers while the formerly abundant factor (labor) benefits…w/r should increase.
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The composition of trade The success of HO in explaining trade patterns during the Great Specialization probably not all that surprising. Written at the time and based on close empirical observation. But is it a general theory on the composition of trade?
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By far, building on and testing the HO model was the predominant activity in international trade from the 1950s through the 1980s. It all started with Leontief (1953)—the first
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Lecture 07 - webnotes - Introduction The composition of...

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