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OVERVIEW OF SECTION I: INTERNATIONAL TRADE THEORYSection I of the text is comprised of six chapters:Chapter 2Labor Productivity and Comparative Advantage: The Ricardian ModelChapter 3 Specific Factors and Income DistributionChapter 4Resources and Trade: The Heckscher-Ohlin ModelChapter 5The Standard Trade ModelChapter 6Economies of Scale, Imperfect Competition, and International TradeChapter 7 International Factor MovementsSECTION I OVERVIEWSection I of the text presents the theory of international trade. The intent of this section is to explore the motives for and implications of patterns of trade between countries. The presentation proceeds by introducing successively more general models of trade, where the generality is provided by increasing the number of factors used in production, by increasing the mobility of factors of production across sectors of the economy, by introducing more general technologies applied to production, and by examining different types of market structure. Throughout Section I, policy concerns and current issues are used to emphasize the relevance of the theory of international trade for interpreting and understanding our economy.Chapter 2 introduces students to international trade theory through the Ricardian model of trade. This model shows how trade arises when there are two countries, each with one factor of production which can be applied toward producing each of two goods. Key concepts are introduced, such as the production possibilities frontier, comparative advantage versus absolute advantage, gains from trade, relative prices, and relative wages across countries. The Ricardian model is a useful starting point for developing intuition about why countries gain from trading with each other. By using even as simple a framework as the Ricardian model, one can begin to debunk some common misconceptions concerning comparative advantage.Chapter 3 builds upon the insights from Chapter 2 by developing trade models which allow countries to produce goods when production requires more than one factor of production. One important reason for this addition to the model is that this more general framework highlights the effects of trade on income distribution. The first model presented includes factors of production which are specific to the production of each of two goods. Then, a more general model is introduced, with this latter model allowing for both mobile and specific factors of production. This extension provides an even richer analysis of the income distribution effects of trade. These models set the stage for an initial discussion of the political economy of trade and for justifying economists support of the principles of free trade among nations.Chapter 4 introduces the classic Heckscher-Ohlin model of trade. The chapter proceeds by first presenting a general equilibrium model of an economy with two goods produced by two factors under the assumption of fixed coefficient production functions. Many of the important results of international trade theory are developed. These include: the Rybczynski Theorem, the Stolper-Samuelson Theorem, and the Factor Price Equalization Theorem. Implications of the Heckscher-Ohlin model for the pattern of trade among countries are discussed, as are the failures of empirical evidence to confirm the predictions of the theory. Chapter 5 presents a general model of international trade which admits the models of the previous chapters as special cases. This standard trade model is depicted graphically by a general equilibrium trade model as applied to a small open economy. Relative demand and relative supply curves are used to analyze a variety of policy issues, such as the effects of economic growth, the transfer problem, and the effects of trade tariffs and production subsidies. The appendix to the chapter develops offer curve analysis.While an extremely useful tool, the standard model of trade fails to account for some important aspects of international trade. Specifically, while the factor proportions Heckscher-Ohlin theories explain some trade flows between countries, recent research in international economics has placed an increasing emphasis on economies of scale in production and imperfect competition among firms. Chapter 6 presents models of international trade that reflect these developments. The chapter begins by reviewing the concept of monopolistic competition among firms, and then showing the gains from trade which arise in such imperfectly competitive markets. Next, internal and external economies of scale in production and comparative advantage are discussed. The chapter continues with a discussion of the importance of intra-industry trade, dumping, and external economies of production. The subject matter of this chapter is important since it shows how gains from trade arise in ways that are not suggested by the standard, more traditional models of international trade. The subject matter also is enlightening given the increased emphasis on intra-industry trade in industrialized countries.Chapter 7 focuses on international factor mobility. This departs from previous chapters which assumed that the factors of production available for production within a country could not leave a countrys borders. Reasons for and the effects of international factor mobility are discussed in the context of a one-factor (labor) production and trade model. The analysis of the international mobility of labor motivates a further discussion of international mobility of capital. The international mobility of capital takes the form of international borrowing and lending. This facilitates the discussion of inter-temporal production choices and foreign direct investment behavior.
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