Econ0602-Lecture-3

Econ0602-Lecture-3 - Topics Econ0602: Lecture 3 Three...

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1 Econ0602: Lecture 3 A General Framework of Foreign Trade and Investment © HKU Econ0602 Larry QIU 2/49 Topics ± Three alternative vehicles of entering a foreign market: ± 3.1. Export ± 3.2. FDI ± 3.3. Licensing ± 3.4. Who do what 3 3.1 Theories of International Trade © HKU Econ0602 Larry QIU 4/49 Basic Questions on Trade ± What determine a country’s pattern of trade? ± Is there a gain from trade? ± What are the impacts of trade policies? ± Why is free trade often obstructed? ± What is the relationship between regional and global trade?
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© HKU Econ0602 Larry QIU 5/49 Why and how do countries trade? A debate between Adam Smith and David Ricardo ± Absolute advantage ± Smith, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” ± “Not really”, said Ricardo. 1723 1723 -1790 1790 1772 1772 -1823 1823 © HKU Econ0602 Larry QIU 6/49 Ricardian Model (technology) ± China and US, car and garment, units of labor used to ± produce one car in China: 9 ± produce one unit of garment in China: 3 ± produce one car in US: 4 ± produce one unit of garment in US: 2 ± US has absolute advantage in both goods, and comparative advantage in car. ± China has comparative advantage in garment. © HKU Econ0602 Larry QIU 7/49 Heckscher-Ohlin (H-O) Model (resource endowment model) ± Technology ± Car is capital intensive ± Textile is labor intensive ± Endowment ± China is labor abundant ± US is capital abundant ± China has comparative advantage in textile ± US has comparative advantage in car 2 5 textile 20 10 car capital labor 1899 -1979 1979 0.8 billion .5 billion US 0.6 billion 1 billion China capital labor © HKU Econ0602 Larry QIU 8/49 Pattern of trade and gains from trade ± A country exports the good which it has comparative advantage and imports the good which it has comparative disadvantage. ± Trade allows countries to specialize and exploit the benefits of comparative advantages. ± Every country has comparative advantage in some goods. ± Free trade is the best trade policy.
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© HKU Econ0602 Larry QIU 9/49 Sources of comparative advantage ± Labor productivity (Ricardian Theory) ± Natural resources endowment (Heckscher- Ohlin Theory) ± Income redistribution effects of trade (Stopler- Samuelson Theory) ± A country’s abundant (scarce) factor benefits (loses) from trade ± Applications to China? © HKU Econ0602 Larry QIU 10/49 China’s Comparative Advantages ± China is relatively abundant in: ± Unskilled labor. ± China is relatively short in ± Skilled labor; ± Capital and technology ± Thus China ± enjoys its comparative advantage in textile and clothing ± has comparative disadvantage in capital-intensive goods like automobiles and aircrafts. © HKU Econ0602
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Econ0602-Lecture-3 - Topics Econ0602: Lecture 3 Three...

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