© Olaf Tijhuis
Samenvatni Seminars Trade & Finance
Week 1:
Exercise 1:
Testni our theor: Countries that are diferent trade, there is a comparatve advantaie because oone
of these)
- Diferent technoloiies oiicardo )
- Diferent endowments oHeckscher Ohlin)
One of these makes it interestni to trade is what we think tll now.
We also need to see if these theories actuall: work. This is wat assiinment 1 is about.
Example Chili
Export mainl: copper, import electronics and petroleum. China fts the picture/theor:, countries that
are diferent specialize and start tradini.
Example Spain
Import and exports similar products. Export German:, UK and Ital:. Import UK, China and German:.
More or less the same import and export partners ocountries that are fairl: similar, Ital: and Spain)
and products. SO this is a countr: that doesn’t ft the theor:. Spain is diferent.
Example Sweden
Mainl: trade with German:, a similar countr:.
Countr: Great-Britain ofiures from 2015)
Main tradini partners
- Export United States 54,7 Billion dollars
- Import German: 58 Billion Dollars
Main tradini products
- Export Gold 41,6 Billion Dollars
- Import Machiner: 48,48 Billion dollars
Also the UK, doesn’t ft the theor: of comparatve advantaie. There is not a lot of comparatve
advantaie trade with the UK. Because the: trade with ver: similar countries, so we need to refne
the ariument. More than 50% of trade cannot be explained b: comparatve advantaie.
So we need more theories, to explain trade. Comparatve advantaie is not a iood explanaton for all
trade.
The main tradini partners of the US are Canada and Mexico, the reason for this is transport costs.
This is one of the assumptons that is not true about iicardo, no transport costs. We see here that
transport costs have infuence on trade. Also tradini a lot with these countries, because of an
institutional reason: the: have NAFTA oa trade aireement) this makes tradini cheaper.
Conclusion: So what we are seeini is there a lot more reasons for trade than just comparatve
advantaie.
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,© Olaf Tijhuis
Extra theory:
Proof of the pudding:
- Trade between similar countries cannot be explained b: comparatve advantaie owhich
builds on diferences between countries).
- Alternatve expiaton
1. Gravity model of trade: diference and size mater for trade. Countries trade a lot with
countries that are close b:, aloni the border trade.
Also from a cultural point of view: it is easier to io to :our neiihbourini countr: to
trade :ou understand the laniuaie and habit of countries, it easier than a countr:
further awa:. Not onl: transport costs mater but also countries that are close to another
atract each other iravit: model of trade.
Also size maters, if there is a huie countr: with a huie econom: it is easier to trade with
them. The: trade a lot, so it is easier to trade with them.
2. Economies of scale: this is another ariument, more theoretcal. If :ou increase the
output, produce more, the averaie costs are lower. Larier scale is efcient. Once :ou are
at a larie scale it is difcult for others to enter the market, because the other companies
have ver: low averaie costs.
This is diferent than diminishini returns In producton with more than one input,
"diminishini returns" refers to what happens when we increase one input while keepini
all the rest constant. "Economies of scale" is a more informal term for "increasini returns
to scale" and so relates to what happens when we increase all inputs b: the same
proporton owhile, and this is important, we keep the technoloi: unchanied).
There are two t:pes of economies of scale
- External: benefts of scalini up an entre industr:. There is a crew that is doini
nothini in maintenance in one industr: and can also work for another industr:.
So maintenance can become an individual industr:, instead of beini part of an
industr: and sometmes doini nothini, which can be hired for some tme.
You can save on costs of producton because :ou onl: need them for 20% and
not for 100%. The other 80% the maintenance crew works in diferent industries.
So scalini up will lead to the possibilit: for sharini services, lowerini the costs.
Other example all the banks are in one cit:, because the: can beneft from each
other. Sectors as a whole beneft from concentratni. Bankini sector in one
place, is for example for sharini knowledie. ICT frms beneft from beini in
Silicon Valle:.
In the end this leads to specializaton and tradini one product for another
product, with the internal this is diferent.
- Internal: the beneft of havini a larier scale falls within one compan: which
pushes out other companies. Ford produces almost the entre car themselves, if
:ou scale up producton, then :ou need a factor: to produce a part. The factor:
produces more than that is needed for the car, the: sell parts to other
companies. This factor: can deliver to Ford but also other companies. The
specializaton within the industr:, companies ietni separate businesses,
business for ever: part of the cars. You iet scale benefts within these parts. This
is a reason for trade, which can’t be explained b: comparatve advantaie.
Specializaton also leads to tradini within industries, because internal economies
of scale.
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,© Olaf Tijhuis
So internal economies of scale leads to specializaton within compan: parts and
parts of products, and that leads to trade within industries. Mercedes bu:s car
parts in France a reason for trade that is not comparatve advantaie.
Result: product diferentaton and intra-industr: trade.
Consequence of economies of scale: We ariue that trade is iood for a countr: as a whole, but there
are some thinis that are not benefcial.
We iet a huie concentraton of producton in ver: limited countries or onl: 1.
Market concentraton
1. Monoply: this leads to price setni; the prices io up. You don’t produce at :our most
efcient point, so this is a loss of welfare. The other reason for loss of welfare is that
most of the welfare ioes to producers and consumers lose relatvel: more. The econom:
as a whole loses welfare.
Disadvantaie of economies of scale and more trade is we iet huie monopolists that
have a lot of power, we can’t control these companies, this is a huie problem, because
of the loss of welfare.
2. Monopolistic competition: for instance, windows, Windows has a huie part of the
market, and can use that power. As with monopol: we can’t control this.
3. Oliiopol: ointerdependencies)
With trade more suppliers for consumers suppliers can compete with companies in the
other countries)
1. Countr: A 5 suppliers countr: B suppliers 7 12 suppliers in total, with 2 markets.
2. Sinile market oA+ B) 9. There are less producers in total, from 12 to 9, so there is a bit of
market concentraton, not iood for the econom:. But for consumers the choice of
companies is larier. For A, the: have 9 instead of 5, and for B 9 instead of 7.
Unbundling (ontvlechting) and globalization
Two factors which have hade infuence on the unbundlini of producton and consumpton and
ilobalizaton.
Trade costs:
- Becomini lower and lower o19th and 20th centur:)
- Producton separates from consumpton
- ieiional specializaton northern parts specializes in industr:, the southern in airiculture.
Communication costs:
- Becomini lower and lower oend of 20 th centur:)
- Coordinatni staies of producton becomes easier. You can do one part of producton in one
part of the countr: and do other parts other countries, where it is cheaper. There is a
diference in the spreadini of producton. Not separaton of producton and consumpton,
but separatni the producton itself parts of the producton can be concentrated in diferent
countries. The labour intensive parts of producton will put it in China and control it from
Europe, labour is much cheaper here.
- Industries and oiraduall:) knowledie spread the people in China see and learnini from what
the Europeans are doini, the: miiht one da: be independent because of their knowledie
iain.
- This leads to ilobal value chaines which leads to all kinds of diferent t:pes of trade.
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, © Olaf Tijhuis
Types of trade:
Inter-industry trade: a countr: either imports or exports a certain t:pe of product. So the phrase is
either/or a product. This has is its source in the comparatve advantaie a diference in technoloi:
oiicardo) and/or factor endowments oHeckscher Ohlin).
Intra-industry trade: a countr: both imports and exports a certain t:pe of product. There are two
t:pes of intra-industr: trade
1. Horizontal intra-industry: the term horizontal refers to the fact that the products exchanied
are at the same level of processini, both fnal ioods for example. The source is product
diferentaton, and the role is that the two varietes of products are diferent from each
other. For example two diferent fnal products of cheese are exchanied.
2. Vertical intra-industry: an example of this is China import computer components and
assembles them into the fnal product, computers, this is at a diferent staie of economic
processini. The source is mainl: fragmentation: frms have decided to break up the
producton process of computers into tasks or fraiments and distribute them across natonal
boundaries.
Some of the fraimentaton takes place where there is abundant, inexpensive labour. This
source is comparatve advantaie.
Exercise 2:
a.
Output per unit labour Home Foreiin
Food 3 6
Clothini 6 9
The frst assumpton is that the home countr: can produce more efectvel: for the food and clothini.
iicardo sa:s that even thouih home is more productve for both products it makes sense to
specialise and trade.
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