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== '''[[ | == '''[[International economics]]''' == | ||
''by [[User: | ''by [[User:Nick Gardner|Nick Gardner]] and [[User:Martin Baldwin-Edwards|Martin Baldwin-Edwards]] | ||
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''' | '''International economics''' is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration. | ||
For definitions of terms shown in italics in this article see the Related Articles subpage. | |||
===International trade=== | |||
====Scope and methodology==== | |||
The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour | |||
<ref>[http://www.econlib.org/library/npdbooks/Viner/vnstt10.html "A note on the scope and method of the theory of international trade" in the appendix of Jacob Viner ''Studies in the Theory of International Trade'' : Harper and Brothers 1937]</ref>. In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions. | |||
''[[The | The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardo’s Theory of ''Comparative Advantage'' and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade theory, on the other hand, depends mainly upon ''empirical analysis''. | ||
====Classical theory==== | |||
The law of ''[[comparative advantage]]'' provides a logical explanation of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its exposition by John Stuart Mill <ref>[http://www.econlib.org/Library/Ricardo/ricP2a.html#Ch.7,%20On%20Foreign%20Trade,%20comparative%20advantage David Ricardo ''On the Principles of Political Economy and Taxation'' Chapter 7 John Murray, 1821. Third edition.(First published: 1817)]</ref> the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage. However, extremely restrictive (and often unrealistic) assumptions have had to be adopted in order to make the problem amenable to theoretical analysis. The best-known of the resulting models, the [[Heckscher-Ohlin theorem]] (H-O) | |||
<ref>[http://internationalecon.com/Trade/Tch60/T60-8.php The Heckscher-Ohlin Theorem]</ref> depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital (referred to as factor endowments). The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labour-intensive products. The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the "[[Leontief Paradox]]" (the discovery that, despite its capital-rich factor endowment, America was exporting labour-intensive products and importing capital-intensive products <ref>Wassily Leontief, ''Domestic Production and Foreign Trade: The American Capital Position Re-examined'' Proceedings of the American Philosophical Society, vol. XCVII p332 September 1953</ref>) Nevertheless the theoretical techniques (and many of the assumptions) used in deriving the H-O model were subsequently used to derive further theorems. The [[Stolper-Samuelson theorem]] <ref>[http://www.ucd.ie/economic/staff/pneary/pdf/stolpers.pdf The Stolper-Samuelson theorem]</ref> <ref>Wolfgang Stolper and Paul Samuelson ''Protection and Real Wages''' Review of Economic Studies, 9: 58-73. 1941</ref> , which is often described as a corollary of the H-O theorem, was an early example. In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the price of the other factor will fall (rise). In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it. Another corollary of the H-O theorem is Samuelson's factor price equalisation theorem <ref> Paul Samuelson: "International Trade and the Equalization of Factor Prices", '' The Economic Journal'' June 1949</ref> which states that as trade between countries tends to equalise their product prices, it tends also to equalise the prices paid to their factors of production. Those theories have sometimes been taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. (But, as noted below, that conclusion depends upon the unlikely assumption that productivity is the same in the two countries). Large numbers of learned papers have been produced in attempts to elaborate on the H-O and Stolper-Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns. | |||
''[[International economics|.... (read more)]]'' | |||
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Revision as of 04:50, 10 February 2012
International economics
by Nick Gardner and Martin Baldwin-Edwards
International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration.
For definitions of terms shown in italics in this article see the Related Articles subpage.
International trade
Scope and methodology
The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international mobility of the capital and labour [1]. In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions.
The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardo’s Theory of Comparative Advantage and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade theory, on the other hand, depends mainly upon empirical analysis.
Classical theory
The law of comparative advantage provides a logical explanation of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its exposition by John Stuart Mill [2] the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage. However, extremely restrictive (and often unrealistic) assumptions have had to be adopted in order to make the problem amenable to theoretical analysis. The best-known of the resulting models, the Heckscher-Ohlin theorem (H-O) [3] depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the relative abundance of labour and capital (referred to as factor endowments). The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labour-intensive products. The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the "Leontief Paradox" (the discovery that, despite its capital-rich factor endowment, America was exporting labour-intensive products and importing capital-intensive products [4]) Nevertheless the theoretical techniques (and many of the assumptions) used in deriving the H-O model were subsequently used to derive further theorems. The Stolper-Samuelson theorem [5] [6] , which is often described as a corollary of the H-O theorem, was an early example. In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the price of the other factor will fall (rise). In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it. Another corollary of the H-O theorem is Samuelson's factor price equalisation theorem [7] which states that as trade between countries tends to equalise their product prices, it tends also to equalise the prices paid to their factors of production. Those theories have sometimes been taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. (But, as noted below, that conclusion depends upon the unlikely assumption that productivity is the same in the two countries). Large numbers of learned papers have been produced in attempts to elaborate on the H-O and Stolper-Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade patterns.
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