Why does trade occur?

Suppose labor required per unit of following products for india and U.S is:

SILK PCs

INDIA 5 15
U.S. 20 5

WHICH COUNTRY HAS ABSOLUTE ADVANTAGE

IN PRODUCTION?
IF TOTAL LABOR EMPLOYED IN PRODUCTION IS:

SILK PCs

INDIA 180 40

U.S. 120 60

WHAT WILL BE THE TOTAL OUTPUT?

WHAT IF ALL LABOR IS SHIFTED TO AREA
OF ABSOLUTE ADVANTAGE?
WHAT DOES IT SHOW?
“If a country can supply us with a commodity cheaper than we ourselves can
make it, better buy it of them with some part of the produce of our own industry,
employed in a way in which we have some advantage.”
It is the maxim of every prudent master of the family, never to attempt to make at
home what it will cost him more to make than to buy. The tailor does not attempt
to make his own shoes but buys them from shoemaker. What is prudence in
conduct of every family can scarce be folly in that of a great kingdom.”

READ THE CASE GIVEN

WHAT DOES THIS SHOW?
Suppose labor required per unit of following products for india and U.S is:

SILK PCs

INDIA 10 20
U.S. 5 15

WHAT DOES IT SHOW?

IF TOTAL LABOUR EMPLOYED IS:

SILK PCs

INDIA 180 40
U.S. 120 60

WHAT WILL BE THE TOTAL OUTPUT?

IF ALL LABOR IS SHIFTED TO AREA OF
SPECIALIZATION WHAT THE NEW OUTPUT?
THERE ARE TWO COUNTRIES INDIA AND US,WHAT WILL BE THE MAJOR
FACTOR OF PRODUCTION IN THESE?
WHAT WILL HAPPEN TO PRICES OF SPECIALIZED AND NON-
SPECIALIZED PRODUCTS IF THEY
DO NOT TRADE?
TRADE?
HECKSHER OHLIN THEORM:
It says that a capital-abundant country will export capital-intensive good
while a labor-intensive country will export labor-intensive good.
Once trade is allowed between the two countries, profit seeking firms will
move their products to the markets that have relatively higher price. Thus
capital abundant country will export capital-intensive good while labor
intensive will export labor-intensive good. Trade flows will rise till the
prices of both goods are equalized in the two markets.
WHAT WILL BE THE CHANGE IN PRICES OF FACTORS OF
PRODUCTION:LABOR AND CAPITAL IN THESE COUNTRIES?

The Stopper Samuelson model:

It states that if the price of capital intensive good rises then the price of
capital, the factor used intensively in that industry will rise, while the wage
rate of labor will fall. Similarly if the price of labor intensive good were to
rise then the wage rate of labor will rise and rental rate would fall. This
further has a magnification effect in case the nations open to free trade. In
case of free trade the real return of a country’s abundant factor would rise
while that of relatively scarce factor will fall.
IF FREE TRADE OCCURS WHAT WILL HAPPEN TO WAGE RATES ACROSS
LABOR INTENSIVE AND RENTALS ACROSS CAPITAL INTENSIVE
COUNTRIES?

Factor-Price Equalization model:

This theorem says that when prices of the output goods are
equalized between countries, as when they move to free trade,
then the prices of factors (capital and labor) will also be equalized
between these countries.
AS
MRP = MP*Price
HOW WILL TRADE AFFECT ISSUES SUCH AS INVESTMENT, POPULATION
GROWTH AND HENCE LABOR FORCE GROWTH, IMMIGRATION,
EMIGRATION ETC.?

The Rybczynski Theorem:

This theorem states that; an increase in country’s endowment of a
factor will cause an increase in output of the good which uses that
factor intensively, and a decrease in output of the other good; this
will lead the direction for Investment, population growth and hence
labor force growth, immigration, emigration etc.

Leontiff paradox
 WHAT AFFECTS EXCHANGE RATES?
Anything which affects prices of commodities also affects prices of
currencies
What is it?
DEMAND AND SUPPLY
WHAT CAN AFFECT DEMAND AND SUPPLY?
INFLATION
INTEREST RATES
BOP
MONETARY POLICY
EXPECTATIONS.
APPERECIATION/DEPRECIATION OF A CURRENCY

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