Pugel_14_SG_CH04 - CHAPTER 4 TRADE: FACTOR AVAILABILITY AND...

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CHAPTER 4 TRADE: FACTOR AVAILABILITY AND FACTOR PROPORTIONS ARE KEY Objectives of the Chapter The previous chapter laid the foundation for our basic model in which international trade is driven by price differentials resulting only from differences in (constant) costs of production. In the real world, however, production costs are rarely constant, and demand-side factors such as tastes may affect pre-trade price differentials. Chapter 4 extends our model of international trade to account for increasing costs and for heterogeneous tastes. Here, the production possibility curve may be non-linear, and the pre-trade prices of goods will be determined by a country’s pre-trade production point on that curve. Tastes, as represented by community indifference curves, help us understand how the pre-trade point is established. Because international taste differentials do not seem to be the major determinant of pre-trade prices, we focus our attention once again on supply-side differences in developing the Heckscher-Ohlin model of international trade. A simple H-O model posits a world with two factors of production and two goods. Countries can be characterized as relatively abundant in one factor or another; goods can be characterized as intensively using one factor or another in production. As with all trade, we assume that a country will export the good that it produces relatively cheaply compared to the rest of the world, and will import the good that it produces relatively expensively. Using H-O, we can conclude that a country will export the good that intensively uses its relatively abundant (i.e., cheap) factor of production and will import the good that intensively uses its relatively scarce (i.e., costly) factor of production. After studying Chapter 4, you should be able to 1. explain how increasing marginal costs affect the shape of the production possibility curves. 2.
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Pugel_14_SG_CH04 - CHAPTER 4 TRADE: FACTOR AVAILABILITY AND...

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