Extending Leontief’s view, some of the economists emphasize on the point that it is not only the abundance (scarcity) of a particular factor, but also the quality of that factor of production that influences the pattern of international trade. The quality is so important in their view that they analyse the trade theory in a three-factor framework instead of two-factor framework taken into account by Heckscher and Ohlin. The third factor manifests in the form of: Human capital: It is the result of better education and training.Human capital should be treated as a factor input like physical labor and capital. A country with human capital maintains an edge over other countries with regards to the export of commodities produces with the help of improved human capital. Skill Intensity: The skill intensity hypothesis is similar to human capital hypothesis as both of them explain the capital embodied in human beings. ItContinue reading
International Economics
Factor Proportions Theory of International Trade
Almost after a century and a quarter of the classical version of the theory of international trade, two Swedish economists, Eli Heckscher and Bertil Ohlin, propounded a theory that is known as the factor endowment theory or the factor proportions theory. In fact, it was Eli Heckscher (1919) who mooted the notion of a country’s comparative advantage (disadvantage) based on relative abundance (scarcity) of factors of production. Later on, his student, Bertil Ohlin (1933) developed this notion of relative factor abundance into a theory of the pattern of international trade. Factor Proportions theory of international trade explains that in a two-country, two-factor, and two-commodity framework different countries are endowed with varying proportions of different factors of production. Some countries have large populations and large labour resources. Thus, a country with a large labour force will be able to produce the goods at a lower cost using a labour intensive modeContinue reading
Regional Economic Integration
Regional Economic Integration means agreements between groups of countries in a geographic region to reduce and ultimately remove tariff and non-tariff barriers for the free flow of goods, services and factors of production between each other. GATT and WTO are the biggest association of more than 140 member countries, which strive to reduce the barriers. However, more than regional, WTO has a global perspective. By entering into regional agreements, groups of countries aim to reduce trade barriers more rapidly than can be achieved under WTO. While there have been decreases in the global barriers to trade and investment, the greatest progress had been made on a regional basis. There are many examples in the current popular push on the European Union (EU) and the effects the EU have on a particular business or industry that illustrates this point. Perhaps the best example of the benefits of economic integration and politicalContinue reading
Theory of Absolute Advantage and Comparative Advantage
Theory of Absolute Advantage If one region can produce a commodity with less expense than another, and they exchange, then both should benefit. In a nutshell, this is the law of comparative advantage. It is used as the justification for WTO trade regulations. Some land grows corn better than other land. This economical insight into farming in early 18th Century was the cornerstone of the law of absolute advantage. Some farmland will yield more corn per acre than another, therefore the good land confers an absolute advantage over other regions. The conclusion drawn from this argument is that the farmer of the poor land should change products that it can produce to its absolute advantage, such as grazing sheep. The law of absolute advantage is based on the assumption that competition is the best paradigm within which to build an economy, it assumes that competition will improve production. TheContinue reading
Gains from International Trade and Investment
The major gain of international trade is that it has brought about increased prosperity by allowing nations to specialize in producing those goods and services at which they are relatively efficient. The relative efficiency of a country in producing a particular product can be described in terms of the amounts of other, alternative products that could be produced by the same inputs. When considered this way, relative efficiencies are described as the comparative advantages. All nations can do simultaneously gain from exploiting their comparative advantages, as well as from the large-scale production and broader choice of products that are made possible by the international trade. Suppose that Japan is relatively more efficient in producing steel than food and the United States is relatively more efficient in producing food than steel. So we can expect food to be cheap relative to steel in United States, and steel to be cheap relativeContinue reading
Trends in International Trade and Cross Border Financial Flows
When a firm operates only in the domestic market, both for procuring inputs as well as selling its output, it needs to deal only in the domestic currency. As companies try to increase their international presence, either by undertaking international trade or by establishing operations in foreign countries, they start dealing with people and firms in various nations. Since different countries have different domestic currencies, the question arises as to which currency should the trade be settled in. The settlement currency may either be the domestic currency of one of the parties to the trade, or may be an internationally accepted currency. This gives rise to the problem of dealing with a number of currencies. The mechanism by which the exchange rate between these currencies (i.e., the value of one currency in terms of another) is determined, along with the level and the variability of the exchange rates can haveContinue reading