8_3150_demand

8_3150_demand - Chapter 13 Demand-Based Theories of Trade...

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Chapter 13 Demand-Based Theories of Trade Econ 3150 YorkU 1 Demand-Based Theories of Trade 1. Utility is homogenous, but not identical 2. Utility is identical, but not homogenous 3. Linder Hypothesis 4. Vernon Theory 5. Intra-Industry Trade So far assumed identical and homogenous preferences <=> independent of income, at P* home and foreign consumers consume all goods in the same proportion. Homogeneity means that 2 goods are consumed in the same proportion independent of level of income = consumption expansion paths are straight lines from the origin. Consumers are different, e.g. share of income spent on food and medical care varies across countries:
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Chapter 13 Demand-Based Theories of Trade Econ 3150 YorkU 2 Food Medical Care Bangladesh 59% 2% Greece 30% 6% U.S.A. 10% 14% In real life preferences are neither identical nor homogenous. Look at 2 cases: * Utility is homogenous, but not identical * Utility is identical, but not homogenous 1 . Utility is homogenous, but not identical Assume that if H and F face the same prices, for any level of income H will consume more Y than X , and F will consume more X than Y .
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Chapter 13 Demand-Based Theories of Trade Econ 3150 YorkU 3 Assume PPF h =PPF f – H and F have the same production opportunities. The difference in tastes will result in different autarky prices in H and F. H is biased towards consumption of Y => drives up prices of Y . F is biased towards consumption of X => drives up prices of X . X Y I 1 I 2 I 3 F’s consumption expansion path H’s consumption expansion path
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Chapter 13 Demand-Based Theories of Trade Econ 3150 YorkU 4 If H and F open up to trade H observes cheaper Y in F, F observes cheaper
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8_3150_demand - Chapter 13 Demand-Based Theories of Trade...

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