Question

1a.Discuss the impact of international trade on the incomes or reward of factors in the international trade

b.Do you agree on the statement?" a difference in factors endowment will cause the production of two nations to be shaped differently" .Explain your answer

c.Using relevant examples explain how economies of scale can affect international trade

Answer 1

a) According to the Hecksher-Ohlin theory of trade, a country exports the goods in which it is relatively more endowed with. For instance, there are 2 countries USA and Vietnam, 2 goods machine and food and 2 factors capital and labor. Machines are capital intensiv and USA is relatively more endowed with capital than Vietnam. Then, according to theory, USA will export machine and Vietnam will export food. Furthermore, returns to capital will be more in USA and returns to labor will be more in Vietnam. Hence, factor endowments affect the income of factors.

b) yes, difference in factor endowments will change the shape of production function. A labor intensive country will have a production function biased towards the good that is labor intensive. This is because a labor intensive country can make a labor intensive good more cheaply and effectively.

c) Economies of scale are of two type: external and internal economies of scale. External economies of scale means that numerous small firms assemble together to generate economies of scale. Examples include Silicon valley, where many startups are located closely to develop IT soultions or London, where many finacial centres are closely located and provide services to rest of world.
Internal eonomies of scale means that as ountries open up for international trade, those firms which produce more costly products are driven away from the business. For example, if a country has 7 car manufactuers, 4 big 3 small, then only bigger firms may be able to produce after country opens up to trade. Those firms who do remain in the business are then able to further expand their production due to increased demand.