Sources of Comparative Advantage © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 1 PowerPoint slides prepared by: Andreea Chiritescu Eastern Illinois University

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 2 Producing aircraft and textiles: factor endowments in the United States and China TABLE 3.1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 3 Capital stock per worker of selected countries, 1997* TABLE 3.2

A country exports the good whose production is intensive in its relatively abundant factor. It imports the good whose production is intensive in its relatively scarce factor. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 4 The factor-endowment theory FIGURE 3.1

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 5 U.S.-China trade: top ten products, 2007 (thousands of dollars) TABLE 3.3

By forcing product prices into equality, international trade also tends to force factor prices into equality across countries. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 6 The factor-price equalization theory (a) FIGURE 3.2

By forcing product prices into equality, international trade also tends to force factor prices into equality across countries. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 7 The factor-price equalization theory (b) FIGURE 3.2

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 8 Indexes of hourly compensation, manufacturing workers, 2006 (U.S.=100) TABLE 3.4

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 9 Labor-cost gap per vehicle hurts competitiveness of big three automakers TABLE 3.5

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 10 Inequality of wages between skilled and unskilled workers FIGURE 3.3 By increasing the demand for skilled relative to unskilled workers, expanding trade or technological improvements result in greater inequality of wages between skilled and unskilled workers. Also, immigration of unskilled workers intensifies wage inequality by decreasing the supply of skilled workers relative to unskilled workers. However, expanding opportunities for college education results in an increase in the supply of skilled relative to unskilled workers, thus reducing wage inequality. In the figure, the wage ratio equals wage of skilled workers/wage of unskilled workers. The labor ratio equals the quantity of skilled workers/quantity of unskilled workers.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 11 Factor content of U.S. Trade: capital and labor requirements per million dollars of U.S. Exports and import substitutes TABLE 3.6

The figure suggests that countries that are abundant in skilled labor capture larger shares of U.S. imports in industries that intensively use those factors. Conversely, countries that are abundant in unskilled labor capture larger shares of U.S. imports in industries that intensively use those factors. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 12 Education, skill intensity, and U.S. import shares, 1998 FIGURE 3.4

By adding to the size of the domestic market, international trade permits longer production runs by domestic firms, which can lead to greater efficiency and reductions in unit costs. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 13 Economies of scale as a basis for trade FIGURE 3.5

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 14 Intra-industry trade examples: selected U.S. exports and imports, 2007 (in millions of dollars) TABLE 3.7

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 15 U.S. Steelmakers complain about regulatory burdens TABLE 3.8 Below are some examples of U.S. regulations affecting domestic steel producers: Health Care. U.S. steel companies spent more than $1.5 billion for health care in 2003 for workers, retirees, and dependents. This adversely affects the competitiveness of U.S. steel companies vis-à-vis foreign competitors, many of whose health care costs are borne by government through general tax revenues. OSHA. The complexity and cost of compliance with Occupational Safety and Health Administration (OSHA) regulations continue to increase. Many OSHA rules do not have a sound scientific or medical basis and thus are impractical and cost ineffective. Electricity Policy. Electricity is a major component of steel-manufacturing costs, but it cannot be purchased on a competitive basis as are other commodities. Global Climate Change. Efforts by the United States to achieve a seven percent decrease in greenhouse gas emissions from 1990 levels by the year 2012, as dictated by the Kyoto Protocol, could result in $5 billion in extra annual energy costs for U.S. steel companies. Clean Air. Proposed tighter standards for pollutants could place much of the United States— including many steel industry sites—in nonattainment areas. The result would be enormous new costs for steel, with no comparable requirements for U.S. trading partners.

The imposition of government regulations (clean environment, workplace safety, product safety) on U.S. steel companies leads to higher costs and a decrease in market supply. This imposition detracts from the competitiveness of U.S. steel companies and reduces their share of the U.S. steel market. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 16 Trade effects of governmental regulations FIGURE 3.6

In the absence of transportation costs, free trade results in the equalization of prices of traded goods, as well as resource prices, in the trading nations. With the introduction of transportation costs, the low cost exporting nation produces less, consumes more, and exports less; the high cost importing nation produces more, consumes less, and imports less. The degree of specialization in production between the two nations decreases as do the gains from trade. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 17 Free trade under increasing-cost conditions FIGURE 3.7

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password‐protected website for classroom use 18 Size of transportation costs, selected countries, 2007 TABLE 3.9