International Economics Assignment (H.W 2) PT2

International Economics Assignment
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International Economics Assignment
Explain how the international movement of products and of factor inputs promotes an equalization of the factor prices among nations.
According to the factor equalization theorem, commodity prices and factor prices are equalized between countries when there is free trade. With the absence of trade, a country that has scarcity of factors of production will result in high price for that factor input, while the price will be low where a country has abundant factor. Countries specialize in production of goods where factor inputs are abundant which results to a rise in price. However, with free trade the factor price increases in the country with abundant factors, while it also decreases in a country with scarcity. Thus, ideally the factor prices are equal between two trading partners. Wages in the production of similar goods typically have this characteristic when countries enter into a trade agreement.
The factor endowment theory demonstrates how trade affects the distribution of income within trading partners Explain.
According to the factor endowments theory, comparative advantage occurs because of the differences in resource endowments between trading countries. Because of factor endowment, the returns to scale of the abundant factor input rise and that of the scarce factor input fall having a direct impact on income distribution. In labor abundant countries owners of capital also resist free trade on the grounds that it leads to lower interest rates where capital is abundant typically resists the effects on their wages (Carbaugh, 2011). Ultimately, increase in the returns where the country has abundant factor inputs is accompanied with fall in the scarce factor input, with the abundant factor having more trade gains.
How does the Leontief paradox challenge the overall applicability of the factor endowment model?
The Leontief paradox is in contrast to the Heckscher-Ohlin model of factor endowments, as Leontief found out that the US exported more goods that were labor intensive even though the US was more capital intensive. These differences are thought to come about because of efficiency whereby the US labor force is thought to be more efficient than in other countries. On the other hand, the factor endowment model assumes that trade patterns favor countries in which they have comparative advantage through factor inputs (Carbaugh, 2011). One possible explanation for the paradox is that there is a need to distinguish between factor inputs. The US has more skilled labor which means that this could be categorized as human capital.
Do recent world- trade statistics support or refute the notion of a product life cycle for manufactured goods?
World trade statistics now confirm that the product life cycle model is indeed true, and the production of mobile phones follows this trend. In the 1980’s up to the mid 1990’s, the mobile phone was at the introduction stage in America as few people subscribed to the services of mobile service providers. Then, there was growth in the use of the mobile phone up to the early years of the new millennium. Essentially, phone usage rose substantially the product became essentaial in the lives of people as subscription rates also shot up. Furthermore, there have been tremendous improvements from the initial product with smartphones now the main focus of handset manufacturers. Manufacture of handsets now leans more towards smartphones from Europe, America to Asia. Through international trade increase in the production, and exchange of mobile phones there is evidence that the product life cycle does exist.
Distinguish between intra industry trade and inter industry trade. What are some major determinants of intra industry trade?
International trade includes both intra trade and inters trade, but they have their differences. Intra industry trade is the trade of similar products, whereby there is trade in products from the same industry. With the advent of globalization there is more intra trade among trading partners as outsourcing has gained a more prominent role, countries use comparative advantage in intra industry trade. According to the Heckscher –Ohlin model, through intra industry trade countries export products in which they have abundant facto inputs (Carbaugh, 2011). In contrast, inter industry trade relates to the trade of products from different industries. Inter industry trade typically occurs because of competitive advantage that countries have with regards to different products.
Less developed nations sometimes argue that the industrialized nations tariff structures discourage the less developed nations from undergoing industrialization.
If the importing nation is large relative to the world, the imposition of an import tariff may improve its international terms of trade. Industrialized countries can influence the international terms ...