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Chapter 4notes

The document discusses topics related to international trade including definitions of terms like intrafirm trade and offshoring. It also covers theories such as the Stolper-Samuelson Theorem and Specific Factor Model, predicting how trade affects income distribution among factors of production. Examples are given around trade patterns and effects on wages. The document also includes an image identifying areas A, B and C relating to country income levels.

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anhthu11112002
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25 views

Chapter 4notes

The document discusses topics related to international trade including definitions of terms like intrafirm trade and offshoring. It also covers theories such as the Stolper-Samuelson Theorem and Specific Factor Model, predicting how trade affects income distribution among factors of production. Examples are given around trade patterns and effects on wages. The document also includes an image identifying areas A, B and C relating to country income levels.

Uploaded by

anhthu11112002
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Name: Dang Thuy Duong – 1606078

Chapter 4: Comparative Advantage and Factor Endowments


1. Definitions
Magnification Effect: Firms that engage in international trade tend to trade with each other
more than they would if they did not trade abroad. This is due to the fact that increased
specialization and economies of scale can lead to enterprises becoming more competitive in
both domestic and foreign markets.
Intrafirm trade: is trade between subsidiaries of the same multinational corporation (MNC).
It is an important part of global trade, accounting for roughly one-third of total trade flows.
Intrafirm commerce can take many different forms, including the exchange of products,
services, and intellectual property.
Off-shoring: is the practice of transferring production or commercial activities to another
country, usually in order to save money or gain access to new markets. Offshoring is
frequently connected with manufacturing, but it can also apply to other industries such as
information technology and customer service.
Outsourcing: is the contracting out of a business process to a third-party provider.
Outsourcing can be done both locally and globally. Outsourcing is frequently utilized to save
money, increase efficiency, or obtain access to specialist knowledge.
2. The Stolper-Samuelson Theorem predicts that income accrues how? (Hint: you’ll
need to involve trade and factors of production).
The Stolper-Samuelson Theorem is a fundamental concept in international trade theory,
particularly in the Heckscher-Ohlin model. It predicts that changes in relative factor prices, such
as wages or return on capital, affect the distribution of income among factors of production,
specifically labor and capital. An increase in the relative price of a good in a specific factor
increases its return.
For example, if a country specializes in producing goods that are labor-intensive and the price of
those goods increases due to international trade, the theorem predicts that the income of labor
will rise, while the income of capital (which is not as intensively used in the production of these
goods) will decline. Conversely, if a country specializes in capital-intensive goods, an increase in
their relative price will lead to an increase in capital's income and a decrease in labor's income.
Stolper-Samuelson equation Theorem emphasizes the relationship between international
commerce and income distribution, and it provides insight into how changes in trade patterns and
the prices of relative factors can affect the economic well-being of various sources of production
within a country.
3. According to the Specific Factor Model, how do we determine which countries export
what good? Also, how does income accrue to the factors of production?
The Specific Factor Model states that the pattern of commerce is determined by the relative
quantity of specific factors in each country. If a country has more money than land, it will export
the good that uses capital the most and import the good that uses land the most. The income of
the various factors is determined by the price of the product that they produce. If the price of the
good grows, so does the income of the specific factor, and vice versa. The revenue of the
mobility factor (labor) is determined by the average labor productivity in both sectors. When the
price of one commodity rises, labor demand in that sector rises while labor supply in the other
sector falls.
In the Specific Factor Model, income distribution is determined by the relative prices of goods
and the marginal products of the factors. Owners of specific factors in the export sector will
benefit from trade, while owners of specific factors in the import-competing sector will suffer.
The impact on labor is uncertain because it is determined by the relative change in wage rates
and the price index. Labor will generally benefit if the export good is labor-intensive and suffer
if the import good is labor-intensive.
4. Identify areas A, B, and C and also identify which type of country is on the left and right
panels.

Based on the image you sent, the following are the areas A, B, and C, as well as the type of country on
the left and right panels:

Areas A, B, and C:

Area A: High-income countries

Area B: Upper-middle-income countries

Area C: Lower-middle-income and low-income countries

Type of country on the left and right panels:

Left panel: High-income countries

Right panel: Upper-middle-income countries, lower-middle-income countries, and low-income countries

5. Does trade have any effect on the number of jobs in the medium- and long-run and wage
inequality?
In my opinion, I think Yes. Trade can have effects on the number of jobs and wage inequality in
the medium- and long-run.
In the medium and long run, trade can have an impact on job numbers and pay disparity. In the
near run, trade might result in job losses in industries that compete directly with imports.
However, trade is typically regarded to create more employment than it loses in the medium and
long run due to greater economic growth and new demand for goods and services. Trade can also
have an impact on pay disparities between and within countries. Trade between countries has the
potential to raise salaries for skilled workers in wealthy countries while lowering wages for
unskilled people in developing countries. Trade among countries can lead to increased salaries
for export-oriented businesses and lower wages for import-competing industries.

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