Welcome to our

presentation
Group 2
Members:
▪ Tran Quoc Hao – B2206570
▪ Nguyen Thanh Lan – B2206576
▪ Nguyen Thi Huynh Nhu - B2206584
▪ Lai My Quyen - B2206588
▪ Nguyen Nguyen Khai - B2206532
Sources of Comparative
Advantage
After completing this chapter, you
should be able to:
• Discuss the theory of factor endowments.
• Identify the predictions of the theory of overlapping demands
• Explain how industrial policies may create comparative advantage
and how environmental regulatory policies may alter comparative
advantage
• Intra-industry trade
• Discuss the effects of transportation costs on international trade
CHAPTER OUTLINE
1. Factor Endowments as a Source of Comparative Advantage
2. Economies of Scale and Comparative Advantage
3. Overlapping Demands as a Basis for Trade
4. Intra-Industry Trade
5. Technology as a Source of Comparative Advantage: The Product Cycle Theory
6. Dynamic Comparative Advantage: Industry Policy
7. Government Regulatory Policies and Comparative Advantage
8. Transportation Costs and Comparative Advantage
 3.1
Factor Endowments as a Source of
Comparative Advantage
 a. The Factor-Endowment Theory
▪ The Factor-Endowment Theory (Heckscher-Ohlin Theory): The immediate basis for trade
is the difference between pre-trade relative product prices of trading nations :

• Prices depend on the production possibilities curves and tastes and preferences (demand
conditions) in the trading countries.

• Assumption: technology and demand are approximately the same between countries.

• Production possibilities curve demand on technology and resource endowments.

▪ Capital/Labor Ratio: determines comparative
advantage
▪ A country exports a good that uses a large amount of
its relatively abundant resource
▪ A country imports a good that (in production) uses
its relatively scarce resource
9
 b. Visualizing the
Factor-Endowment Theory
FIGURE
3.1
• U.S MRT = 0.33

• China’s MRT = 0.4

The US has a comparative

advantage in aircraft while
China has a comparative
advantage in textiles
c. Factor Price Equalization:
The Stolper-Samuelson Theorem
• Redirects demand away from the scarce resource towards the
abundant resource in each nation
• Trade leads to Factor-Price Equalization
• The cheap resource becomes relatively more expensive
• The expensive resource becomes relatively less expensive
• Eventually, price equalization occurs
FIGURE
3.2
d
Specific Factor: Trade Distribution
of Income In the Short Run
Specific Factor: Trade Distribution of
Income In the Short Run
▪ Specific – Factor Theory:
o Analyzes the income distribution effects of trade in the
short term, when resources are immobile among
industries
o Specific Factors:
• Workers acquire skills for specific occupations, not easily transferable
to other industries
• Resources specific to import-competing industries lose as a result of
trade
• Resources specific to export industries gain as a result of trade
e. Does Trade Make the Poor Even Poorer?
▪ Wage gap: skilled and unskilled workers
o Some combination of trade, technology, education, immigration,
and union weakness
o Income inequality – pervasive
o Wages of skilled workers “relative” to those of unskilled workers

• Outcome of the interaction between supply and demand in the

labor market
e. Does Trade Make the Poor Even Poorer?
▪ International trade and technological change
o Increase in the demand curve of skilled workers relative to
unskilled workers
• Higher degrees of wage inequality
▪ Immigration
o Decrease in the supply of skilled workers relative to unskilled
workers
• Higher wage inequality
3.2
Economies of Scale and
Comparative Advantage
Economies of scale
3.2a
Internal economies of scale
Figure 3.3 illustrates
the effect of
economies of scale
on trade.
 International trade permits longer production runs by
domestic firms.
 Provide additional cost incentives for specialization in
production.
 Specialization in a few products.
 3.2b
External economies of scale
External economies of scale exist
when the firm’s average costs
decrease as the industry’s output
increases
External economies of scale
can occur in several
situations
 External economies of scale can occur in
several situations
 The rising concentration of an industry’s firms.
 Disseminating new knowledge about production technology.
 Development of a country.
 Competition for input supplies reduces the price of raw materials
for production.
 3.3
OVERLAPPING
 Theory of Overlapping Demand:
 Factor-endowment theory – explains trade in primary products and agricultural
goods
• Does not explain trade in manufactured goods
 Forece influencing manufactured-good trade

• Domestic demand conditions

 Firms within a country – manufacture goods for which there is a large domestic
market
• A nation’s exports – an extension of the production for the domestic
market
 Theory of Overlapping Demand:
 Consumer demand - conditioned strongly by income levels

• A country’s average or per capita income will yield a particular pattern of demand

• Nations with high per capita income will demand high-quality manufactured goods

(luxuries)

• Nations with low per capita income will demand lower-quality goods (necessities)
3.4 Intra-industry
trade
Definition

34
Intra-industry
trade includes trade in
homogeneous (standardized) goods as
well as in differentiated products.
Intra-industry trade in
homogeneous goods is seasonal.
Benefits of
Intra-industry trade
• Improved production efficiency

• Increase product diversity

• Increased competitiveness
3.5 Technology as a Source of
Comparative Advantage: The
Product Cycle Theory
• Technology are an important source of comparative advantage at
a particular point in time
• Technological advantage is often transitory
The product life
cycle theory
• The product life cycle theory focuses on the role
of technological innovation
• a key determinant of the trade patterns in
manufactured products.
 The stages that many manufactured goods go through comprise the
following:

1. Manufactured goods are introduced to the home market .

2. Domestic industry shows export strength.

3. Foreign production begins.

4. Domestic industry loses competitive advantage .

5. Import competition begins.

 3.6
Dynamic Comparative
Advantage: Industrial Policy
David Ricardo’s theory:
▪ Present perspectives on the dynamics of comparative advantage in
industries and international economic policies.
▪ Explain the concept of specialization and reallocation of resources
within a country according to Ricardian theory.
▪ Emphasize that this theory is static and inflexible in adapting to
changes in industries' comparative advantages over time.
The remarkable postwar
economic growth of the East
Asian countries:
▪ Attribute to a modification of the static comparative advantage
theory.
▪ Japan recognized the dynamic comparative advantage through the
mobilization of skilled labor, technology, and capital.
▪ Government can establish policies to promote opportunities for
change through time.
The expected outcome:
1/ High average level of domestic productivity.
2/ Increase competitiveness in global markets.
What is Industrial Policy?
▪ A strategy to revitalize, improve, and develop an industry.
▪ Advocate argue: Governments should enact policies promoting
the growth of emerging "sunrise" industries.
▪ Involve directing resources to industries with the highest
productivity, strong linkages to the overall economy (e.g.,
semiconductors), and significant future competitiveness.
Government Policies
▪ Include antitrust immunity, tax incentives,…
▪ Create comparative advantage.
▪ Encourage resources to move into industries.
Some example for
Dynamic Comparative
Advantage and
Industrial Policy:
The Boeing-Airbus subsidy conflict
(Industrial Policy).
48
 3.7
Government Regulatory Policies
and Comparative Advantage
OSHA, CPSC, and EPA (USA) enforce
regulations
Leading to higher costs for domestic firms
despite their technological advancement and
environmental responsibility.
However, the policy trade-off of the United States:

- Contribute to cleaner air and water, enhancing the quality

of life for American households.

- The competitiveness of other industries may benefit from

improved environmental conditions.
Former President Donald
Trump's efforts to reduce
federal regulations
 3.8
Transportation Costs and
Comparative Advantage
Transportation costs

Freight charges

Packing and Insurance

handling expenses premiums
 THANKS
FOR
LISTENING