Page 46 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes
Labour (L) Territory (T) L/T T/L
A X Y X -
X 20 95 0.21 4.75
Y 10 5 2.00 0.50
Total 30 100 0.30 3.33
B X Y - Y
X 3 5 0.60 1.66
Y 10 2 5.00 1.20
Total 13 7 1.85 0.53

A country having a bigger offer in a resource than in another is relative abundant in that resource
and tends to produce more products that use that resource. Countries are more efficient in
producing goods for which they have a relative abundant resource.
According to the Heckscher-Ohlin theory, trade makes it possible for each country to specialize.
Each country exports the product the country is most suited to produce in exchange for products
it is less suited to produce. In our case, country A is relative abundant in territory (T) and will
specialize in producing food (X) and country B is relative abundant in labour (L) so it will specialize
in producing textiles (Y). In this case, trade may benefit both countries involved.
The changes in relative prices of goods have a powerful effect on the relative income obtained
from the different resources. International trade also has an important effect on the distribution of
incomes.
2. Specific Factors and Income Distribution (Paul Samuelson - Ronald Jones Model)
There are at least two reasons why trade has an important influence upon the income distribution:
(a) resources can't be transferred immediately and without costs from one industry to another.
(b) industries use different factors and a change in the production mix a country offers will
reduce the demand for some of the production factors whereas for others it will increase it.
Paul Samuelson and Ronald Jones, two American economists, elaborated a trade model based on
specific factors.
This is a tri-factorial model because it is based on 3 factors: labour (L), capital (K) and territory (T).
Products like food (X) are made by using territory (T) and labour (L) while manufactured products
(Y) use capital (K) and labour (L). From this simple example it is easy to observe that labour (L) is
a mobile factor and it can be used in both sectors of activity, while territory and capital are specific
factors.
A country having capital abundance and less land tends to produce more manufactured products
than food products, whatever the price, while a country with a territory abundance tends to produce
more food. If the other elements are constant, an increase in capital will mean an increase in
marginal productivity from the manufactured sector, while a rise in the offer of territory will
increase the production of food in the detriment of manufacturers.
When the two countries decide to trade, they create an integrated global economy whose
manufacture and food production is equal with the sum of the two countries' productions. If a
country doesn't trade, the production for a good equals the consumption.
The gains from trade are bigger in the export sector of every country and smaller in the sector
competed by imports.
3. The Standard Model of Trade (Paul Krugman - Maurice Obsfeld Model)
The standard model of trade implies the existence of the relative global supply curve resulting
from the production possibilities and the relative global demand curve resulting from the different
preferences for a certain good.

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