Theories of International Microeconomics

Theories of Inter content Microeconomics1. IntroductionEconomic scheme fire be considered as a system of ideas that contains a set of mildews designed to explain economic outcomes and make predictions for future events. The choice of the exemplar get out depend principally on the explanatory value and the certainty of the model in explaining current situations and predicting future outcomes. international mete out is the difference in the midst of production and consumption. The theory of supranational batch has heavily been influenced by the flora of virtuous economists. According to David Ricardo, duty occurs in the midst of countries because of differences in technology. For Eli Heckscher and Bertil Ohlin, bargain arises principally delinquent to differences in means givings and broker intensities of respective countries.2. Ricardian lessonThe Ricardian Model was developed in 1817 by David Ricardo (1817) with ii computablelys, devil countries and a single input as comp iodinnts of the model. This model assumes differences in technology betwixt countries as basis of trade. Ricardo stated that both countries could benefit from trade on the embodiment that get input of countries should be divers(prenominal), irrespective of the fact that one terra firma might has an absolute advantage in the production of both goods. world a one federal agent model, the Ricardian Model is not the appropriate model to take away the effects of technology on trade patterns because of its simplicity.3. The Heckscher Ohlin ModelThe Heckscher Ohlin (HO) theory holds two assumptions countries incur different factor endowments and factor intensities as antecedents of differences in opportunity costs of production. muckle is restricted mingled with 2 countries, 2 factors of production and 2 goods traded. This model generates 4 predictions (a) The Heckscher Ohlin theorem, whereby the enceinte abundant body politic will merchandise the capital in tensive good, (b) The Factor Price razing Theorem, with production of different goods, external trade will equalize factor charges, (c) The Stopler-Samuelson Theorem, with production of different goods, an increase in the scathe of a labour intensive good will reduce the real and relative consecrate to capital and will increase the real and relative government issue of the get the picture intensive good, (d) The Rybczynski Theorem, with production of different goods, a rise in the endowment of labor, will lead to a more than proportionate increase in the output of the labor intensive good and a fall in the capital intensive good.3. 1 The Heckscher Ohlin TheoremThe Heckscher Ohlin theorem implies that a country will export those goods that atomic consequence 18 produced through intensive use of factors of production found locally in an abundant amount. In a 2 2 2 model, countries produce the same pair of commodities, engage in free trade in a competitive environment with countries benefitting from constant clears to scale in accordance with technology. The supply of factors of production is perfectly ine terminalic in both countries. These conditions are award when in that location is relative factor abundance. A flash situation tush arise where autarkic factor harms are present in both countries. Demand and supply conditions dictate autarkic factor prices. Despite a country being relatively abundant in labor, it may nonetheless impose autarkic wage rate if domestic help preferences pattern strongly favors the labor intensive produced good relative to the outside(prenominal) produced good. The trade pattern will reflect the factor price equation between countries.3.2 The Factor Price Equalization TheoremThis theorem assumes a situation where there are 2 countries in free trade they have different factor endowments but have the same level of technologies. If both countries are diversified and Factor saturation Reversal (FIR) does not occu r, factor price equalization will happen in these countries. For Heckscher, identical production techniques were necessary for the equalization of factor prices. Different factor prices can be a sufficient cause for international trade to happen. However, Heckscher did not account for the fare of factors and international markets. The sign model was a 3 2 classical model with 3 factors such as land, labor and capital, and two goods stuff and machinery.3.3 The Stopler-Samuelson TheoremThe Stopler-Samuelson Theorem was developed as a 2 2 model, with two traded goods and two non traded factors. It sets forth that an increase in the relative price of a good will lead to an increase of real return of that factor apply intensively in producing that good and will reduce real return to the second factor. Four possible interpretations arise from this theorem (a) winners and losers corollary If a relative price change occurs, there will be a negligible of one loser ans one winner (b) Factor constancy insulant corollary external price changes will have an impact on the return to a factor irrespective of which industry the factor is employed (c) onlyly factor corollary 1 trade barriers will help a scarce factor an abundant factor is hurt (d) scarce factor corollary 2 depending on the scarcity of the factors, trade barriers will help.3.4 The Rybczynski TheoremThe two factor two good Rybczynski Theorem posits that if there is an increase in factor endowment of an industry that uses that factor fully, an increase in output is likely to occur compared to a decrease in output in the other industry. in that respect are 4 levels of interpretation that can be observed from the Rybczynski Theorem (a) a minimum of one Rybczynski derivative will be negative, (b) a homothetic relationship exists between output and factor supplies, (c) the relationship will be a running(a) one, (d) the total amount of current factor supplies is important.4. International Trade The sayInternational microeconomics seems little affect by empirical evidence. Despite trade flows being measured with the greatest accuracy, the data obtained has not been really sure and to certain extent inaccessible. data-based studies based on this data can hardly be reviewed or taken seriously as a proper revaluation of the theories proposed by classical economists.Attempts to b dislodgege the gap between the trade patterns and the theoretical assumptions made by the various classical and neo classical models have been made and several problems arose. The first problem that rises is that international trade is arbitrage. This is principally due to price discrepancies governing the international markets. autarkical prices differences have not been observed and these discrepancies are hypothetical in nature. There is no solid evidence as international trade gets rid of these discrepancies. another(prenominal) difficulty linked to this is causality. Whatever the consequence, the h uman mind has endlessly hoped that a single cause must be behind its initial inception. The Ricardian Model and the Heckscher Ohlin model are unicausal. Everything has a single root. For arbitrage in international trade, autarkic prices discrepancies cannot be the only explanation as to why there is arbitrage in the first place. Changes in factor endowments, tastes and preferences or differences in technologies can form part of the supplementary explanations.In the last 4 decades, there have been 3 types of empirical studies on international trade. These are tests of the Ricardian and HO models, studies trying to find a link between bilaterally symmetrical trade, national incomes and geographical distances between trading countries, and finally, a number of informal accounts yet to be tested and accounted for.MacDougall (1951, 1952) carried out a memorize using 1939s data for a UK-US comparison to find whether exports of good of different countries were correlated in pairs with t hird markets as the Ricardian model presumed. Results were positively and significant. Later empirical studies provided additional support to these results (MacDougall et al., 1962, Stern, 1962 Balassa, 1963)The assumption that consumers have homothetic preferences has been through empirical observation refuted. Following studies carried out by Prebisch (1950) and Singer (1950), results have showed that the terms of trade for poor countries has been deteriorating continuously. As world economy experiences economic growth, the relative submit shifts from the southward to the industrialized nary(prenominal)th, a region that specializes in goods with higher income elasticity. The South benefits little from improvement in production in exports sectors, principally because the supernumerary purchasing power generated by lower southern commodities will be spent on purchase of northern commodities.Studies carried out by scholars affected significantly the reliability of the HO theorem. Patterns of trade were examined between US, West Germany, lacquer and Canada with the rest of the world. Results obtained were not in consensus with the HO theorem whereas results of East Germany and India showed support (Bharadwaj, 1962 Leontief, 1953, 1956 Roskamp, 1961 Stolper and Roskamp, 1961 Tatemoto and Ichimura, 1959 and Wahl, 1961). Another study carried out by Clifton, Jr and Marxsen (1984) obtained relatively the same results. They used a multi-commodity, two-country, and two factor model to test for trade based on profit and wages instead of using capital and labor as factors of production. Results obtained show trade patterns for the year 1968 of Australia, Ireland, Japan, Korea, New Zealand, and the United States support the theorem piece of music results of UK, Kenya and Israel do not.In his study to discover the sources of the success of the American industry for the years 1879, 1899, 1909, 1914, 1928, and 1940, Wright (1990) concluded that the capital to labor rat io was an important source of comparative advantage in the early years but it in short became a comparative disadvantage by 1940. Natural resources did not consecrate to exports success in the 19th century but in the twentieth century it impacted exports significantly. The reasons provided by the HO theorem that difference in capital and labor endowments are the primary reasons for trade is wrong and thus a need for further study in this area.The most important study of trade patterns through use of HO models was carried out by Leontief (1953). The results showed that in 1947, U.S imports were more capital intensive compared to labor than the ratio in U.S exports. This conundrum exists if U.S is well endowed in capital. This paradox can be solve through 2 ways (a) by creating demand or factor intensity reversals (FIRs), (b) the introduction of international technological differences. By introducing these solutions, the American labor intensive industries benefited from significan t advantage in terms of costs arising due to factor endowments.Linnemann (1966) using data from more than 40 countries carried out a study to find a link between bilateral trade, national incomes and geographical distances between trading countries. He wanted to find answers relating to the bilateral trade volumes and trade size with different trading partners. Results illustrated that the volume of trade depends much on the geographical proximity of trading partners inclusive of rape costs. The importing countrys national income and the exporting countrys national income also had an impact on the size of tradable commodities.Minhas (1963) carried out a study to question the applicability of the FPE theorem due to the presence of Factor Intensity Reversals (FIRs). Minhas came to the conclusion that when elasticity of substitution differs between countries, FIRs are likely to occur. with trade, equality of commodity prices will not guarantee a price equalization of factor prices in respective countries.ConclusionTrade occurs evidently because of the price discrepancies that exist in the markets. Technological differences and factor endowments are the important reasons for these discrepancies. The numerous and complex literature on the Ricardian Model and Heckscher Ohlin Model have outlines various faults of these models but they nonetheless remain healthy. However, additional modifications need to be done. The models need to account for technological differences, multiple cones of diversification and home bias.ReferencesRonald Winthrop Jones. A, 1979, International Trade Essays in conjecture, Oxford North Holland Publishing Co, Amsterdam, New YorkRonald Winthrop Jones. A and Kenen Peter B. (Eds.), 1984, Handbook of International Economics 3, North HollandBalassa, B. 1963, An Empirical materialization of Classical Comparative Cost opening, The Review of Economics and Statistics, Aug, Vol. 45, No. 3, pp. 231-238Mac Dougall, G. D. A, 1951, British and Ameri can Exports A Study Suggested by the Theory of Comparative Costs. incision I, The Economic Journal, Dec, Vol. 61, No. 244, pp. 697-724Mac Dougall, G. D. A, 1952, British and American Exports A Study Suggested by the Theory of Comparative Costs. Part II, The Economic Journal, Aug, Vol. 62, No. 247, pp. 487-521Feenstra Robert, C. 2002, Advanced International Trade Theory and Evidence, University of California, Davis, and National Bureau of Economic Research, Aug.Prebisch, R. 1950, The Economic Development of Latin America and Its Principal Problems, New York United Nations, Econ. Comm. Latin AmericaClifton, D. S, Jr and William B. Marxsen, 1984, An Empirical Investigation of the Heckscher-Ohlin Theorem, The Canadian Journal of Economics / Revue canadienne dEconomique, Feb, Vol. 17, No. 1,pp. 32-38Matsuyama, K., 2000, A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences Demand Complementarities, Income Distribution, and NorthSouth Trade, Journal of Political Eco nomy, Dec, Vol. 108, No. 6, pp. 1093-1120Redding Stephen J., 2006, Empirical Approaches to International Trade, Oct, capital of the United Kingdom School of Economics and CEPR