HECKSHER OHLIN - 2618-CH03 10:26 AM Page 61 UNIT TWO...

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UNIT TWO International Trade: Enduring Issues 61 3 Sources of Comparative Advantage 4 Regulating International Trade—Trade Policies and Their Effects 5 Regionalism and Multilateralism 2618-CH03 10/15/02 10:26 AM Page 61
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Fundamental Issues 62 CHAPTER THREE Sources of Comparative Advantage 1. What is the factor proportions explanation of comparative advantage? 2. What is the Heckscher–Ohlin theory of trade? 3. How well does the factor proportions approach explain trade patterns? 4. What is the relationship between trade and factor prices? 5. What is the relationship between trade and real income? 6. Is international production consistent with the concept of comparative advantage? 7. How does economic growth affect trade patterns? Passage of the North American Free Trade Agreement significantly reduced trade restrictions among Mexico, Canada, and the United States. Textile trade between the United States and Mexico is one of the most affected in- dustries. Mexican garment assemblers were the primary beneficiaries, as they became the largest exporters of sewn garments to the United States. At the same time, U.S. textile mills became the largest exporters of fabric to Mexico, accounting for 40 percent of the total value of fabric exports to Mexico. As a result, the textile industry has interesting and complex relationships involving Mexican and U.S. firms. Firms manufacture yarn in the southern United States for export to Mexico. Processors in Mexico then dye the yarn and export it back to the United States. U.S. textile firms mill the dyed yarn into cut pieces of fabric and export it back to Mexico. Garment firms in Mex- ico assemble the fabric pieces into garments and export them back to the United States for final sale. Why do some stages of textile manufacturing occur in Mexico while others take place in the United States? In the case of dyeing yarn and assembling 2618-CH03 10/15/02 10:26 AM Page 62
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garments, certain regions in Mexico have two important resources: rela- tively inexpensive labor, which is required for garment assembly, and rela- tively inexpensive water, which is required for the dyeing process. The United States has firms with high levels of capital used to mill yarn and fabric concentrated in the southeastern region of the country. W hy do residents of nations export certain products and import others? In the previous chapter you found that a key basis of trade is comparative advantage. What, then, is the source of a nation’s comparative advan- tage? In this chapter you will learn about the factor proportions explanation of comparative advantage. You will also develop an understanding of how to relate the factor proportions approach to issues such as factor prices, free trade’s winners and losers, outsourcing, and economic growth.
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HECKSHER OHLIN - 2618-CH03 10:26 AM Page 61 UNIT TWO...

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