International Trade Theories

Transcription

1 International Trade Theories Supplementary Teaching Material (Draft in Revision (c Dr. Sıtkı Yürekli. Table Of Contents Introduction Considerations On Equilibrium Analysis...6 Introduction To International Trade And Finance...7 artial Equilibrium In A Competitive Market...11 artial Equilibrium: Demand, Supply And rice Determination...12 Market Equilibrium Under Interventions:...14 artial Analysis With International Trade:...18 Wealth Effect Of Trade: Surplus Analysis...18 Considerations On Factor Markets: Labor And Capital In Motion...23 Extending The Analysis Of Trade: From One Economy One Commodity To Two Economy Two Commodity Models...23 Tutorial uestions:...24 Readings:...29 International Trade Analysis Commodity Exchanges, roduction And roduction Factors The Law Of Comparative Advantages...31 Mercantilism...31 Analysis Of Advantages...32 Classics Adam Smith...33 Classics David Ricardo...36 Comparative Advantages And Gains From Trade...36 Gains From Trade...38 roduction ossibilities With Constant Opportunity Costs (Real Terms...39 Haberler's Opportunity Cost Theory (Constant roduction Costs:...41 Efficiency In roduction And Marginal Rate Of Transformation (MRT:...46 Trading ossibilities On Constant Opportunity Costs (Real Terms...48 Comparative Advantages With Monetary Terms:...52 Haberler's Opportunity Cost Theory (Variable roduction Costs:...53 Tutorial uestions :...60 Readings:...75 Growth And Trade Economic Growth And International Trade...77 (Draft in Revision age 3 of 214 (c Dr. Sıtkı Yürekli. Closed Economy Multiplier Equilibrium In Closed Economy Money Markets uantity Theory Of Money Equilibrium In Close Economy Capital Markets And Investment Expenditures162 Internal Equilibrium In Closed Economy (IS LM Macroeconomic Analysis Of External And Internal Equilibrium Aggregate Demand And Supply In Open Economy Open Economy Multiplier Equilibrium In Open Economy Money And Capital Markets Internal And External Equilibrium In Closed Economy (IS LM Bo Tutorial uestions: Readings: Flexible Versus Fixed Exchange Rates Exogenous (Constant Supply Of Currencies And Fixed Exchange Rates Endogenous Supply Of Currencies And Flexible Exchange Rates Tutorial uestions: Readings: The Monetary Approach The uantity Theory Of Money And The Law Of One rice uantity Theory Of Money And urchasing ower Tutorial uestions: Readings: The International Monetary System Gold Standard System Bretton Woods System Managed Flexibility System Tutorial uestions: Readings: Concluding Remarks Reading Materials Texts And Articles: Historical Case Study On An Export oriented Industry And Foreign Trade: Research apers, roceedings And resentations: The Analytical Considerations On The Equilibrium Analysis In Economics: Introduction To International Trade And Finance International economic relations, starting from the early ages of economic analysis, are always been an essential part of the theoretical elaborations. Mostly because of the inherent limits exposed by the available resources which is underlining the main problem area of economics, the provision of necessary goods and services for the changing patterns of human needs within the defined constraints, and together with the intensely knitted economic relations between individual entities of economic phenomena, likely discussions on the international trade relations are being fortified more than before. However, the essential tools of analysis, the reasons because of which the countries are intending to be a part of the trade relation and the consequential benefits, or the gains from the trade, as well as the concluded prices with their potential effects on the overall economic process are all keeping their priority, and almost with the same initial reference points that have already been given even into the early accounts of the international trade analysis. Into this part of the unit, starting from the preliminary subjects and with references to the early discussions of (Draft in Revision age 5 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 7 of 214 (c Dr. Sıtkı Yürekli.

2 countries the aggregated products and the overall resources require the analytical considerations for the analysis of gains or if any the losses from the trade. Not only the production units but also the consumers in the demand side and being affected by their incomes over their decisions towards the consumption is referring another building block of the analysis of trade relations. This is also how the governments and their political considerations regarding to the required balance of the budget and because of their two sided roles in economies as a producer and as a consumer which gives them a control over the economic phenomena, is being involved into the analysis. Bhagwati positioned the above briefed study area of international economics or international trade theories with references to the distinctions enclosed by the coverage of each analytical structure i.e. to the real and the monetary segments of the economy, and within the known streams of economic analysis of positive and normative with below demarcating points. Into which definitions the pure analysis of economics, this is traditionally stemmed away from the main economic discourse by an holistic approach commonly coined to the L.Walras's account, and the normative genre, which again keeps the holistic approach together with the flavor of political considerations, are given as two indicative approaches to the international trade theories in literature: The pure theory of international trade, as distinct from the monetary theory of international trade, analyses problems of international economics in a theoretical framework that typically abstracts from Keynesian problems and is generally cast in the mould of traditional general equilibrium analysis of the Hicksian variety. Within this broad frame, it deals with essentially two different classes of questions: (I those relating to positive economics and (ii those relating to welfare or normative economics. The traditional theory of comparative advantage, for example, straddles both these classes of questions in so far as it attempts both an explanation of the pattern of trade and seeks also ro establish that trade is superior to no trade. Bhagwati, J. (1969:7. defined, primarily the market equilibrium, the equilibrium into the abstract space in which the exchange of goods and services are undertaken, will also be revised with its given essentiality in analysis. artial Equilibrium In A Competitive Market. The market, as an abstract space of exchanges and where the demand and supply are met and reached to an equilibrium price level and the consequential quantity of exchange in interaction between two main forces of the identified process, is subject to the economic analysis in either forms of partial or general equilibrium favors undertaken by a specific focus on the analysis of certain industries or by a holistic analysis. Into the mainstream economic analysis, both of the mentioned approaches to the equilibrium analysis is known based on certain main assumptions which fortify the prepositions of free trade discourse. Full information: One of them is referring to the information regarding to the goods and services as well as the quantities and the prices. This assumption simply accepts that the all available information on a certain good or a service is accessible by the all individuals without being subject to any disruption, distortion and barrier against to those. Free entrance and exit: Another one is on the individuals' ability to access the markets, either from the producers or from the consumers side. It assumes that the entrance to the market and the industry and the exit away are not subject to any barriers. Identical cost structure and identical products: Finally the identical cost structure and the identical products produced by different number of producers is referring to another important assumption on which the mainstream economic analysis is based. (Draft in Revision age 9 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 11 of 214 (c Dr. Sıtkı Yürekli. Equilibrium condition requires D=S would hold = ( = ( = 50 = 2000 currency units. By replacing the yielded equilibrium price into the quantity equations the equilibrium quantities would be calculated as follows: D= = (2000 = units. S= = (2000 = units. rice Equations: Same solution would be illustrated by using the price equations as given below while it is known that equilibrium condition requires S=D would hold: D= D S= S S=D S = D ( 0.04S D = ( = 3200 = units. and consequently the calculated quantity would yield the equilibrium price as follows: = (40000 = 2000 currency units. = (40000 = 2000 currency units. Charged taxes usually results a decrease in exchanged quantities and an increase in the price levels. Additionally, subsidies, in a comparison with the known tax interventions, usually effect the equilibrium quantities and prices over the same mechanisms and in the opposite direction. That's why subsidies are also often called as positive taxes. The partial analysis of any tax or subsidy intervention would be followed as below. Here into the given example the same demand and supply functions are utilized. The effect of policy intervention over taxes is given for two different possible implementation, for the specific and the ad valorem tax, separately. While any amount of tax is considered, depending on its source i.e. the production or the consumption, the subject function needs to be revised accordingly. Into this example its assumed that any amount of specific tax is applied to the production and that is why the supply function is reconsidered for necessary revision. This is shown below for the previously given supply function. uantity equation of supply (production : S= rice equation of supply (production : = S S t = specific tax per unit produced (i.e. kg, ton or boxes. rice with government intervention : G=S + t G= S + t In case of ad valorem tax interventions the necessary revision is shown as below. The ad valorem tax is known charged as a certain percentage of the price and it is effect on the source of the tax, here again it is assumed as the production, requires considering this intervention in that course. By referring to the same supply function that would be shown as follows: (Draft in Revision age 13 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 15 of 214 (c Dr. Sıtkı Yürekli.

3 Subsidies, as another policy tool for the governments to intervene markets also requires the same kind of revision into the subject functions. Subsidy interventions usually utilized to support the production or the consumption by the additional payments either on the specific or on the ad valorem type. That tool is simply compensate the production costs in a certain extend by which the cost of production for the production units becomes lower than the resultant level. In the case of consumption it provides an additional amount for the provision of goods and services and by compensating the expenditures in certain extend it effects the cost of possession for the consumers. Below example is given for any subsidy intervention targeting the production on specific base. also shown as another component of total surplus, here into this example this is shown separately. 3600$ 2000$ 1800$ S = S a b d R= c W + t t =20 W S = S 400$ S =35500 D =44500 M =9000 D = D S = S 2000$ 1990$ 400$ 380$ D = D Example: S = S and the specific subsidy is known 20$ per each unit produced. (Draft in Revision age 17 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 19 of 214 (c Dr. Sıtkı Yürekli. Considerations On Factor Markets: Labor And Capital In Motion 3600$ The analysis of international trade would also require considerations on the factor markets. As its mentioned before, the labor as well as the capital while these are demanded by the local economy and supplied from other countries is also requires the analysis of factor movements. However, their effects on the cost 2000$ $ L W of production which yields to the producers an advantage in a comparison between different substitutes of the product is analyzed within the previously briefed schemes. The effects of factor movements on the economic equilibrium will be discussed in details within the following topics of the unit Extending The Analysis Of Trade: From One Economy One Commodity To Two Economy Two Commodity Models. Few more considerations would be mentioned before a more comprehensive analysis of trade will be given. Into the previous lines the analysis is based on the partial equilibrium analysis of the subject commodity. However the reasons of the international trade with its extensions on the advantages of economies against one to another and on the basis of commodities exchanged between them would better be illustrated by the help of two country two commodity models. This is by the help of reliable assumptions yield more detailed analytical considerations on the equilibrium state of economies in a trade relation. Starting from earlier theories of international trade these will be mentioned into the following topic. (Draft in Revision age 21 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 23 of 214 (c Dr. Sıtkı Yürekli.

4 A and Commodity B would be defined as below: Answer: A = (max.b / max.a B A/B = (max.b / max.a Commodity B B = (max.a / max.b A B/A = (max.a / max.b Section B: uestion.1. 27,5 25 Supply = (1+t 25 Supply = 25 Demand = 95 - World rices: Supply = 25 Equilibrium condition requires: SupplyAfterTax = Demand 95 - = 25 = 70 After Tax: SupplyAfterTax = (1+t25 = 27,5 Equilibrium condition requires: SupplyAfterTax = Demand The below given functions are defined for the market of commodity a: (Mid Term Trimester III, 2014 Supply = Demand = 95 uestion.1.a. What would be the equilibrium price and quantity of commodity a? Answer: Further reading on a likely example: Salvatore 2007:45 uestion.2. d =26 4 and s =2 4 are known the demand and supply functions of a commodity A. Answer following questions: (Salvatore 2007:94 95: 67,5 70 =5.5 = = 27,5 = 67, Supply = Demand = 95 - Supply Demand = = 95 - Equilibrium condition requires: Supply = Demand 95 - = = 90 = 30 Supply = 5 + 2(30 Supply = Demand = 65 uestion.2.a. What is the equilibrium price and quantity =4 =6 =7 of this commodity in national markets? Answer: For the partial equilibrium analysis, d = s is 26 4=2 4 and it yields =5 and =6 for equilibrium price and quantity values. uestion.2.b. 30 Ceteris paribus, what should be the amount of exports while the price of this commodity in international markets is 5.5? (Draft in Revision age 25 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 27 of 214 (c Dr. Sıtkı Yürekli. Readings: The Law Of Comparative Advantages ugel (2004:Chp.1 2. Salvatore (2007:Chp.1 2. Bhagwati (1969:7 8. Mercantilism Mercantilism as one of the oldest academic account on the foreign trade relations between nations mainly gives emphasize to the precious metal stock of countries. The emphasize given to the precious metal stock of nations especially given because of the accepted definition of wealth of the years that the Mercantalist approach to foreign trade is yielding appreciation. The trade between different nations by providing the inflow of money, those were the stamped coins by using precious metals has been accepted as one of the viable way of increasing the wealth of the nation. Again almost the same idea would be identifiable behind the Mercantalist approach to foreign trade while this school of economics was giving references to the potential gains from trade relations. While the available stock of precious metals is limited by quantities, the trade has been proposed in that course to increase the wealth. Another important contribution remains without loosing its importance in the analysis of foreign trade is known referring to the balance of payments. Reading (ugel, Salvatore, Carbaugh, Landert Colander. (Draft in Revision age 29 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 31 of 214 (c Dr. Sıtkı Yürekli.

5 realm of classic school of economics mostly yield references to two prominent accounts of Adam Smith and David Ricardo. Classics Adam Smith Classical school of economics, starting from Adam Smith's works which were mostly advocating the liberal system of economic relations while it is also having propositions on the requirements by which the total production would reach higher quantities is often receive references in the international trade theories. With its extension to the foreign trade, A.Smith's analysis is known advocating the beneficial nature of free trade, by other words the absence of barriers against the trade is accepted one of the necessary requirements for nations to end up with gains from the trade relation. However, this is also known that the reason why the nations are being involved into any trade relation would better be answered with references to the advantages that each partner economy is carrying out with regards to the exchanged products. Absolute advantages, as a term refers to the advantages of countries over the partner economies on the production of certain commodities that would be traded between and having lower cost structures. The cost of production into this analysis refers to the necessary labor that would be employed during the production of any commodity. Hence, following this postulate of classical economic analysis, the advantageous production in a comparison between different economies is a question of employing less labor for the same amount of final product. While the production costs is defined alike, another contribution also often receives references again in line with the production process. This is the emphasize given to the specialization of labor in different batches of the production process, which requires a division of labor between them into the overall production. Having been carried out to an upper level of abstraction, again the specialization on the production of certain commodities would yield beneficial trade relations to the trade partners. On the that the advantageous production is undertaken in U.K. where the required labor for one unit of product is lower than the amount required in U.S. Another interpretation of the same analysis would be given as below (T.A. ugel 2007: Table 2. United States Rest of the World Yard of cloth per labor hour Bushels of wheat per labor hour Labor hours to make 1 yard cloth bushel of wheat Here into this example the labor requirements for each unit of product is also given. As it is shown, the analysis is undertaken with references to the two countries two commodities. However rather than having strict references to the countries, this example is accepted the whole producers which reside into the supply side of the commodity markets the trade partner to United States. With that level of abstraction likely models of advantage comparison would be found more realistic than the previous example. Here in contemporary times any consideration regarding to the products which would be supplied to world markets, clarifying the potential benefits on the advantages carried out in the production refers to various number of economies rather than having definite references to one country. Following the presented figures the advantages of countries would be defined as follows. On the basis of given production requirements for an analysis based on the labor theory of value which accepts the labor as the unique productive resource which is being involved into the production, The United States has an absolute advantage in producing wheat, because in the U.S. Labor productivity in wheat is higher than the rest of the world's labor productivity in wheat. Which consequently yields a lower (Draft in Revision age 33 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 35 of 214 (c Dr. Sıtkı Yürekli. analysis which again refers to the same cost item, or the cost of production, in a comparison between countries and on the basis of the changing labor productivity in the production of different commodities. Constraints on the productive resources remain the same with given emphasizes in his analysis and the proposed considerations on trade also refer to the same problem of increasing the wealth of countries while the limits are exposing themselves in each time the total product is increased because of the increasing requirements of population. Trade between countries become an answer how to reach the higher quantities of required commodities into the economy while the constraints are defined in that shape. Below example is given as an illustration of the comparative analysis (D.Salvatore 2007: Table 3: uantity / One hour labor time U.S. U.K. Wheat (bushels/hour 6 1 Cloth (yards/hour 4 2 Here into this example again a two commodity two country model is considered. Apparently, on the basis of given figures, U.S. is more efficient than, or has an absolute advantage over United Kingdom in the production of wheat. And again U.S. is more efficient than, or has an absolute advantage over the United Kingdom in the production of cloth. (Salvatore 2007: Following A.Smith's analysis which refers to the absolute advantages, in likely cases, if any country has an absolute advantage on the production of considered commodities, trade would not be a matter of consideration. However, on the basis of D.Ricardo's propositions, even while the production costs exhibit a likely structure which yields an absolute advantage to any one of two countries, the productivity differences between the production of two commodities in each country would roduction ossibilities With Constant Opportunity Costs (real Terms. An analysis which refers to any one of the mentioned economies, requires the consideration of before trade equilibrium would be shown by the help of below illustration. Here into that illustration the constraints or the limits of productive capacities is shown by the production possibilities as a straight line drawn between the attainable maximum production quantities of each commodity. These quantities are placed as MaxA and MaxB on each axis. Also because of the assumed cost structure which is shaped out with constant opportunity costs the limits over the productive capabilities of any economy is shown with the line placed straight between these quantities. This is called as the production possibilities frontier on which every quantity pair of subject commodities is indicating an attainable maximum quantities to be produced. Additionally each of the illustrated quantities is implying the full employment of productive resources. Depending on the necessity presumed regarding to the reallocation of resources in each time another production level is chosen, the forgone quantities of production or the changing amount of production is also shown by the same frontier line. This is the opportunity cost which is defined with references to the increasing or wordfully, the changing production quantities. Consequently, by technical terms, the changing amounts of production is also shown identifying the slope of frontier line and into this example, while the cost of production is accepted as constant it yields a constant slope on each point. The analytical illustration of them, with references to the comparative advantages would be given as follows. (Draft in Revision age 37 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 39 of 214 (c Dr. Sıtkı Yürekli.

6 Commodity B Country A Commodity B Country B Cloth U.S. Cloth U.K. Relative rices and Opportunity Costs Wheat Relative rices and Opportunity Costs Wheat income. While it is known that the production functions would be defined as below and representing the relation between the production and the required B Max.B quantities of each that need to be employed, the overall however a briefly abstracted scheme of the same illustration would be defined as follows: roduction Functions: A = f(l A,K A B = f(l B,K B A C A OA 'A A Also it is known that each of the mentioned factors of production needs to be C B OA allocated in the production of the subject commodities, hence accepting that all of them are employed these would be defined as below: Max.A ' B B uantities of roduction Factors: L = L A + L B K = K A + K B With those which are given briefly regarding to the production of commodities, the previously mentioned concept of opportunity cost would be reconsidered in B Max.B details as follows. C B OA Haberler's Opportunity Cost Theory (constant roduction Costs: A Following G.Haberler's extensive elaboration with references to the trade relations between countries, the opportunity cost of production for each Max.A C A OA ' A A commodity is known become one of the mostly referred tool of trade analysis (Haberler 1950, The concept of opportunity cost with its most contemporary structure would be defined as follows: ' B B The opportunity cost is, the amount of the other good you give up to get more of this one. (Lindert & ugel, Chp.2. According to the opportunity cost theory, the cost of a commodity is the amount of a second commodity that must be given up to release (Draft in Revision age 41 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 43 of 214 (c Dr. Sıtkı Yürekli. The opportunity cost of commodity productions would also be defined with references to the mentioned quantity changes as below: As it is shown below these definitions also yield the slope of production possibilities frontier. Commodity B Max.B ' B B '' B ' A α F α. A Max.A The opportunity cost of commodity A production (C OA is also denoted as the cost of last unit produced, this is the cost of A production at the margin or conventionally called as the marginal cost (MCA : '' A F U.S. F U.K. c / =120/180 w w / =180/120 c c / =120/60 w w / =60/120 c A = MCA = COA Assuming that the cost of production is constant, prices of commodities on the basis of internal barter terms and by means of each of them, their prices are defined as follows: (Draft in Revision age 45 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 47 of 214 (c Dr. Sıtkı Yürekli.

7 Cloth Wheat (Specialization Before Trade = 90 After Trade = 110 Gain from Trade = 20 Cloth Before Trade = 60 After Trade = 70 Gain from Trade = 10 Wheat Cloth Cloth (Specialization Before Trade = 40 After Trade = 50 Gain from Trade = 10 Wheat Before Trade = 40 After Trade = 70 Gain from Trade = A = (max.b / max.a B = 120/180 B A/B = (max.b / max.a = 120/180 Commodity B U.S. U.K. B = (max.a / max.b A = 180/120 A B/A = (max.a / max.b = 180/120 U.S. U.K. Wheat Cloth Wheat Cloth Opportunity Cost 120/ / /60 60/120 2/3=0.67 3/2=1,5 2/1=2 1/2=0,5 Wheat production: the world price should be between the margins of opportunity costs for each country to agree on a mutually beneficial trade: 0,67 units of cloth < world price of wheat < 2 units of cloth Cloth production: the world price should be between the margins of opportunity costs for each country to agree on a mutually beneficial trade: 0,5 units of wheat < world price of cloth < 1,5 units of wheat roduction possibilities with constant opportunity costs (real terms. Following those the before and after trade as well as the gains of both countries from the trade of subject commodities after specialization would be shown by the help of following illustrations. Again as it is shown the analysis of gains requires the before and after trade analysis in a comparison regarding to the initial and the concluded quantities. (Draft in Revision age 49 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 51 of 214 (c Dr. Sıtkı Yürekli. Following these figures which are indicating the production costs of each commodity in each country the comparative advantages of countries would be identified to conclude if the trade between them has a beneficial basis. 1 = U.S. Dollar prices. Country 1: U.S. Country 2: U.K. 2 = U.K. ound prices. Exchange rate: 1=$ Commodity 1: $1 0,5 $2 1 Wheat (bushels/hour Commodity 2: $1,5 0,75 $1 0,5 Cloth (yards/hour Salvatore, 1999: Haberler's Opportunity Cost Theory (variable roduction Costs: Here upto this point all analysis is undertaken by utilizing the constant opportunity costs. However, to reach a more reliable point of view on the same course, the variable production costs would be found more realistic as considered in the following lines and regarding to the trade analysis. Into this shape, the opportunity cost of production is getting higher values while reaching to the higher quantities of any product. Also mainly because of the increasing scarcity rather than allocating the resources to the production of only one commodity, the specialization is indicating a state of production where the allocated quantities are only exhibiting a choice towards in that structure. For any selected pair of commodity production the relative prices would be defined by the slope of the tangential line passing through that point on the production possibilities frontier. Varying Opportunity Cost (Varying slope along the F For any point on the F i.e. ( A, B Opportunity Cost of (C OA C OA = 1 / C OB = B / A Opportunity Cost of Commodity B (C OB C OB = 1 / C OA = A / B And in a relation with Marginal Rate of Transformation the same variables would be defined as below: Varying Opportunity Cost (Varying slope along the F For any point on the F i.e. ( A, B Opportunity Cost of (C OA C OA = 1 / C OB = B / A = MRT = A / B Opportunity Cost of Commodity B (C OB C OB = 1 / C OA = A / B = MRT = A / B The equilibrium condition on the supply side of commodities is defined with equal MRT and relative prices. While the production possibilities frontier is defining the limits of attainable production in any economy, on the demand side the demanded quantities requires the elaboration of social indifference curves. The general equilibrium condition for any economy requires the elaboration of the consumption and production together. (Draft in Revision age 53 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 55 of 214 (c Dr. Sıtkı Yürekli.

8 C B OA C B OA After Trade Commodity B Commodity B roduction+(imports-exports=consumption (' A,'' B Exports = ' A - '' A Imports = '' B - ' B Max.B ' B Balance of Trade Max.B B (Imports-Exports=0 '' B Imports = Exports B ' A A F Max.A E A = M B A / B = M / E = Imports / Exports ' B Relative rices = Terms of Trade = A / B A / B = Slope of the tangential line. F A '' A Max.A Additionally, in the supply side of the economy with the increasing product for which the same country is having advantages in its production and prefers to specialize in its production after trade quantities would be shown with A' and B'. Following these the difference between the demanded quantities of commodities and the produced amounts would yield the trade figures. The excessive demand indicates an import while an excessive supply defined as a concluded exports. With references to the gains from the trade and the quantities produced and demanded the after trade equilibrium is shown in a comparison ' A Before Trade roduction=consumption ( A, B After Trade roduction+(imports-exports=consumption (' A,'' B Exports = ' A - '' A Imports = '' B - ' B Balance of Trade (Imports-Exports Gains from Trade = Commodity B= '' A - A '' B - B (Draft in Revision age 57 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 59 of 214 (c Dr. Sıtkı Yürekli. yields 100 for the terms of trade value. While it's known that the price changes are 0 for the exports ( =0 and ( =20 for the imports between mentioned years. Based on the provided information, there isn't any price change observed in exportation for the mentioned years, where the average change in import prices is 5% based on 2007 index values. uestion.3.b. Define the relative price intervals for a mutually beneficial trade between the above mentioned countries while country a is specialized on the production of commodity b and country b is specialized on the production of commodity a. (Mid Term Trimester III, 2014 uestion.1.b. While it s known that the price (the price index of exports of exported commodity Answer: is 100 and the price (the price index of imports of imported commodity is 120 for What would be the terms of trade for the same year? Answer: The terms of trade of a nation are given by the ratio of the price index of its exports to the price index of its imports. (Salvatore 2007:104. uestion.2. Commodity B Country A ' A A Commodity B Country B ' A A Below given export and import price indexes are for the years between 2010 and Max.B Max.B 2012: (Mid Term Trimester III, Export prices: Import prices: B C A OA 'B B B C A OA 'B B A A Max.A Answer: Calculate the terms of trade for the given years. What is the percent change of terms of trade between 2010 and 2012? Export prices: (E Import prices: (I Terms of Trade (T t = E / I (98/112*100 (100/100*100 87,5 100 uestion.3.c. It s known that, before trade the commodity a consumption is 50 units in country a. What would be the gains from a mutually beneficial trade between countries while it is known that after trade consumption level for commodity b is 75 units and the marginal rate of transformation is equal to one? (Mid Term Trimester III, 2014 (Draft in Revision age 61 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 63 of 214 (c Dr. Sıtkı Yürekli.

9 Answer: Necessary condition for an optimum level of consumption requires MRS=MRT and it's known that MRS=1 while the maximum attainable production is 10 units for the commodity B it yields 8 units of commodity A consumption, as it's shown in the given graph. uestion.4.b. What would be the marginal utility of commodity B for the same country (community by means of marginal utility perceived from the consumption of commodity A (assume that the utility is quantifiable. Answer: It's known that the optimum level of consumption requires the MUA/MUB=A/B should be met. Where the MRS=MUA/MUB = 1 this also yields MUA = MUB as well. uestion.4.c. It s known that for an abstract country, the social optimum is indicating a marginal rate of transformation of 0.5 for two commodities, A and B, under the absence of any trade. it's known that the maximum attainable amount of commodity B production is 180 units. (Salvatore 2007:46 47 and uestion.4.d. What would be the quantity of commodity A B to be produced while the same country is producing 40 units of commodity A? Answer: MRT is known equal to 0.5 which A max. =90 units. MRT=0.5. means Amax./Bmax.=0.5 and constant for a linear F, thus Amax.=0.5(Bmax. which A=40 yields Amax.=0.5(180=90 units. While it's B B=100 B known that this country is producing 40 max. =180 units. The quantities of commodities A and B that an abstract country is producing are known a=60 and b=30 in the absence of foreign trade. It s also known that after gaining an advantage on the production of commodity B and exporting this commodity to another country, the marginal rate of substitution is reaching to 1. The maximum attainable amount of commodity B production is 180 units for the same economy. Answer following questions, (Salvatore 2007:68 74: uestion.5.b. What are the marginal rate of substitution and the marginal rate of transformation at the social optimum, before and after trade? Answer: Before trade: By assuming that the production quantities of 60 units and 30 units of commodity A and B is illustrating the social optimum in a closed economy, while the F A MRT=1. A=90 A=60 MRT=1/2.5. A=10 B B=30 B=90 B max. =180 units. is linear and exhibiting constant opportunity costs, for the same quantities the necessary condition for the optimum should also be met, which is known MRS=MRT=1/2.5=0.4. After trade: it's known that the MRT=1 and also again while the country is exporting and importing these two commodities, for consumption and production, social optimum requires the same condition of MRS=MRT=1. uestion.5.c. What is the opportunity cost of producing one more unit of commodity A at the social optimum before and after the trade? Answer: Based on the previous analysis, opportunity cost of commodity B is (Draft in Revision age 65 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 67 of 214 (c Dr. Sıtkı Yürekli. U=f(A,B MRS is the ratio between the marginal utilities of the commodities consumed, which is MUA/MUB and with the given x/y ratio it should be MRS=1. And also it's known that 2 units of commodity B consumption indicates the optimum production of the commodity B. Assuming that this a closed economy, for the production side of the economy, any optimum requires the MRT=1 What would be the relative prices of commodities A and B for the same optimum, and for the same country? Answer: That should be equal to the MRT and the definitions should follow the same requirement for an assumption of having the constant opportunity cost. condition is met, and it is also indicating the maximum attainable production for the mentioned commodity. Also it yields the same quantity of commodity A to be consumed which is 2 units. uestion.8. What would be the marginal utility of commodity B for the same country (community by means of marginal utility perceived from the consumption of commodity A (assume that the utility is quantifiable. Again it's known that MRS=x/y=1 and consequently MUA=MUB. uestion.9. It s known that for an abstract country the social optimum is indicating a marginal rate of transformation of 0.5 for two commodities, A and B, under the absence of any trade. Answer following questions, (Salvatore 2007:67 68: What would be the quantity of commodity B to be produced while the same country is producing 40 units of commodity A? Answer: If the social optimum is requiring MRT=MRS in the consumption, and while this information given with an emphasize to the production, consumed quantities would be determined with the same proportions. Assuming that the costs are constant MRT should be same for each possible production possibility. On any tangent point defined as such the below definition would hold on the uestion.10. The quantities of commodities A and B that an abstract country is producing are known a=60 and b=30 in the absence of foreign trade. It s also known that after gaining an advantage on the production of commodity B and exporting this commodity to another country, the marginal rate of substitution is reaching to 1. Answer following questions, (Salvatore 2007:68 74: What are the marginal rate of substitution and the marginal rate of transformation at the social optimum before and after trade? Before and after the trade, for the optimum quantities to be consumed and produced both MRS and MRT before and after trade are required to be equal to the relative prices or the opportunity cost of production. What is the opportunity cost of producing one more unit of commodity A at the social optimum before and after the trade? It should be equal to the marginal rate of transformation. While it s known that after exporting commodity B by 80 units, and still continuing to produce 10 units of commodity A what would be the amount of commodity A imports for the mentioned social optimum? (Draft in Revision age 69 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 71 of 214 (c Dr. Sıtkı Yürekli.

10 If it s known that these prices are 100 for both imports and exports for the base year, 2007, what is the average annual change in export and import prices. uestion.12. Answer following questions on the basis of below given two country two commodity model.(final Trimester III, 2014 Readings: ugel (2004: Salvatore (2007: Haberler (1950, Landreth & Colander (2002. Bhagwati (1969. Maximum Attainable Commodity roduction: Country A Country B Commodity B a. repare the F for country a and calculate the opportunity cost of commodity a production. Assume that the production costs are constant for varying quantities. Answer: Max.A =50 Constant Opportunity Cost assumption (Constant slope along the F requires: C OA = 1 / C = / = MRT = / = 50/100 OB max.b max.a A B C OA = Opportunity Cost of commodity A production. Commodity B Max.B =100 b. Define the relative price intervals for a mutually beneficial trade between the above mentioned countries while country a is specialized on the production of commodity b and country b is specialized on the production of commodity a. (Draft in Revision age 73 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 75 of 214 (c Dr. Sıtkı Yürekli. Capital saving technological progress : In an opposite nature, capital saving technological progress indicates an increasing productivity of capital and consequently the production process of the same product requires decreasing quantities of capital for the same amount of production. Neutral technological progress : Neutral technological progress in a comparison with the previously mentioned types of technological progress yields an increasing productivity both for capital and labour at the end of which with the same amount of capital and labour, while the capital labour ratio remains the same, the higher quantities of production becomes possible. The mentioned types of technological progress would be briefed in the following table: enables them to take advantage of their differing factor endowments. In a country relatively rich in natural resources, for example land, but with a small labor force, land intensive products are relatively cheap, whilst labor intensive products are relatively dear. (Wells 1974:44. Here the mentioned advantage gained because of the abundance of any production factor and the factor requirements of the product. The relation between the quantity of factor supply and their wages would be assistive to clarify the mentioned hypothesis regarding to the gained advantages of countries in likely trade relations. / L = Marginal roductivity of Labour (L M L = w L = F(w Technological progress K/L roduction Labour saving (K/Lt0 < (K/Lt1 =0 Capital saving (K/Lt0 > (K/Lt1 =0 Neutral (K/Lt0 = (K/Lt1 =0 (where Kt0>Kt1 and Lt0>Lt1 w=m L ' S S Whereas regarding to the production process itself, the production technique would be classified in one of the below given categories: Labor intensive : Indicates lower capital labor ratios in a comparison, or capital w' w w'' '' S labour ratios lower than one. Capital intensive : Indicates higher capital labor ratios in a comparison, or capital labour ratios higher than one. Neutral intensity in factor utilization indicates same quantities and yields one ' '' D for the capital labour ratio. These would be briefed into the below given table: (Draft in Revision age 85 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 87 of 214 (c Dr. Sıtkı Yürekli.

11 effecting the factor prices negatively. These are shown with ' < < ''. According to the above mentioned hypothesis, considering two economies with respect to any one of the available factors, for instance the labor, the abundance of labor in one country, would yield an advantage to this country by decreasing the labor costs in a comparison with the second country and for the same commodity. One of the fairly well known indicators of factor endowments is known as the capital labor (K/L ratio which is basically providing an indicator value regarding to the available capital items per unit labor in an economy. Country A Country B Capital Labor K/L 100/ /200 0,75 Based on the above given figures which are for two different countries A and B the resultant capital labor ratios are indicating that: KA / LA > KB / LB Following this, in a comparison on the basis of factor abundance or scarcity, below would be inferred: Country A is relatively capital abundant. Country B is relatively labor abundant. In order to reach any consideration regarding to the advantages in production of commodities and to conclude up with an inference on the potential trade relations the production structure or the factor requirements of commodity productions would also be considered. These are given separately for each country and for each commodity as below. Country A Capital abundant economy. Commodity B production is relatively capital intensive. Country A would have a comparative advantage on the production of Commodity B over country B. Leontief aradox Country B Labor abundant economy. production is relatively labor intensive. Country B would have a comparative advantage on the production of over country A. Heckscher Ohlin hypothesis is known tested by various academics within which the initially defined findings in paradoxical nature has been identified by Wassily Leontief. In his (1951 study Wassily Leontieff has presented the findings of the test which is based on U.S. input output figures and completed with 1947 data. Accepted that the U.S. Economy is known capital abundant, exported commodities should expected to be capital intensive products and the imported commodities should expected to be labor intensive. Import substitutes as a certain classification of commodities refers to the commodities which are locally produced and at the same imported. Leontieff, in his study, has analyzed traded commodities residing under that category. On the basis of the findings the presented paradox is identified by the K/L which is calculated for import substitutes 30% higher than exported commodities. Afterwards these findings which have been reached by W.Leontieff is called Leontieff aradox. The utilized two factor model which is based on K/L has been revised after the paradoxical results of Leontieff (1951. Natural resources, human capital and knowledge based production became points of discussion regarding to their effects on the results, all of which are known initiated the revision of the capital and labor definitions in certain extend. Assuming that in country A the factor requirements of commodities as follows: (Draft in Revision age 89 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 91 of 214 (c Dr. Sıtkı Yürekli. the required economy wide regulations on institutional basis both of them are known being priority issues in political considerations. However the increasing quantities of available factors, or technically speaking the increasing supply of them is known yield up decreasing wages or the consequential production cost decreases. / K = Marginal roductivity of Capital (K M K = i K = F(i i=m C ' S S potential effects of policy implementations or prepositions would be analyzed by utilising the microeconomic or macroeconomic tools of economics. Microeconomic Analysis Analysis of trade policies on the basis of economic entities, individual decision makers, consumers, producers, industries and government. Macroeconomic Analysis Analysis of trade policies on the basis of aggregated economic variables of real and monetary segment as well as the overall assessment of traded commodities and investments. Whereas, also the fairly well known tools of trade policy interventions, either with their effects on individual entities of economies and the economy wide consequential aggregated resultants would be mentioned as follows: i' i i'' '' S Tools For Trade olicies: Tariffs And Subsidies As these are mentioned previously, any tariff intervention or the subsidies are building up a certain component of budget either as a revenue item or as an expenditure while these are also effecting the equilibrium prices and quantities D with increases or decreases. The implemented tariffs would be defined as a ' '' specific component or an ad valorem component of the prices of commodities. Especially within the protective policy consideration tariffs and subsidies are known as fairly well known policy tools to be implemented. While the effect of increasing supply of them is mostly identified with decreasing factor prices in the production side, the factor incomes by providing an inflow in their home countries is shaping out another point of consideration in the realm of international economic analysis. The same phenomenon is also implying an expected tendency in hypothetical nature that the factor prices to reach the same Non tariff Barriers Non tariff barriers basically refer to the policy tools which are implemented with different mechanism other than tariffs. uantity restrictions regarding to the imported commodities or quotas is one of the fairly well known tools being considered within that classification. And again mostly because of protectionist (Draft in Revision age 93 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 95 of 214 (c Dr. Sıtkı Yürekli.

12 based on temporal reasons. Those would be external factors such as market failures in partner economies and consequential effects on the demand of subject industry. Whereas national pride would be defined another argument for likely protectionist policy schemes by which the protection of industries are accepted as a requirement. The domestic products mostly carrying imprints of the local culture and heritage are all known as identified candidates for likely argumentations. Income distribution between the production factors would be another basis for protectionist policy interventions with their specific aims to keep the factor incomes in certain levels against the potential decreases that would be experienced because of the international competition. Mostly because of the development targets requires the economic growth with priority export oriented or import substituting policies are always known being discussed often. ushing exports or promoting exports to reach higher production and income levels and by utilizing policy tools which mostly has a likely effect on the ongoing production of commodities, is known one of the adoptable schemes for governments. Also in order to manage with the potential market failures and to overcome with the monopolistic tendencies certain policy tools having that priority and in an anti dumping nature would be another option. Export Subsidies as it is mentioned before mostly assist the producers by increasing their competitive advantages in international markets with their effect on the production cost that must considered for the production. Beside the mentioned policy schemes within the briefed argumentation the structural options requires institutional regulations in an harmonized pattern between different countries is known as another political consideration. Into that shape the previously defined policy schemes would be found applicable more than one country in a collaboration against the third parties. well as the production factors between the member countries. Again for the nonmember countries the applicable interventions are kept with certain component regulating the trade between them in order to promote the common targets of union. In addition to the mentioned collaborative actions which are undertaken together by various number of countries and mainly promote their production, embargoes is known as a certain economic policy which effects the trade between countries. Analysis Of Tariffs (Small Country rice Taker As one of the main policy tools which is applicable in various cases an illustrative example regarding to the analysis of tariffs and subsidies would be given as below. Here into this example the effects of specific and ad valorem tariff are considered separately. Specific Tariff On Importation. W = W + t t a + t a S = a + b + t S = a + b W = w + t W D = D (Draft in Revision age 97 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 99 of 214 (c Dr. Sıtkı Yürekli. 95 Supply = ,00 Supply = WorldSupply = 25 Demand = 95 - Demand = 95 - Before Tax: = WorldSupply Demand = 25 = 70 All of which is imported in the absence of any local production: Imports = ,0 After Tax: SupplyAfterTax = (1+t25 = 27,5 Equilibrium condition requires: SupplyAfterTax = Demand 95 - = 27,5 = 67,5 All of which is imported in the absence of local production(supply. Supply = 5,5 + 2,2 SupplyAfterTax = 27,5 Local roduction with the same tax intervention: 27,5 = 5,5 + 2,2 Local = Total importation from world markets: imports = Demand Local imports = 67,5 10 = (Draft in Revision age 101 of 214 (c Dr. Sıtkı Yürekli. (Draft in Revision age 103 of 214 (c Dr. Sıtkı Yürekli.