Question

Explain how the Heckscher-Ohlin theorem supports international trade between nations.

2. What is international price equalization? give examples

3. explain two differences between the new trade theory and the traditional trade theory.

4. Explain why America is better suited to export computers while Kenya is better suited to produce hides-and-skin

5. Explain why the infant-industry argument is valid.

6. Explain one reason why the U.S. dollar has higher value than the Indian Ruppies in the international exchange rate marketplace.

7. write out one major difference between a country's balance of trade(BOT) and Balance of Payment (bop).

8. Explain the reason why loans to a country are entered on the Credit Side of that country's Balance of Payment account.

9. Why does the supply of a country's currency increase if/when the country's level of imports increase.explain.

10. Analyze how the exchange rate of the u.s. dollar would be impacted by a fall in U.S. domestic interest rates.

Answer 1

1.Hekscher-ohlin theorem states that if two countries produces two goods and uses two factors of production (say labour and capital) to produce these goods, each will export the good that makes the most use of the factor that is most abundant. It further state that a country which is capital abundant will export the capital intensive good. Hence in this model a country’s advantage in production arises solely from its relative factor abundance. Thus the theorem is capable of predicting the pattern of trade between the countries based on the characteristics of the countries. From the graphical analysis of the theorem it can be seen that it supports the international trade by the fact that the higher price of a product in one nation induces the firms in the other nation to take advantage of that higher price and vice versa.

2. Price equalisation is an economic theory put forward by Paul A Samuelson which states that the prices of identical factors of production, such as wage rate or the rent of capital will be equalized across the countries as a result of the international trade. Wages can be treated as an example for this. Assume that two countries have entered in to a free trade agreement. Hence, by price equalisation we can see that the wages for identical jobs in both the countries approaches each other For example consider the trade between two nations say USA and India. USA is a more capital intensive nation an India is a more labour intensive nation. Thus India can export labour intensive products whereas the USA exports capital intensive ones. Hence in India, the demand for labour would increase which leads to increase in prices on them. Similarly in USA, the demand for labour would decrease. Thus with the other things remaining the same, the prices of labour in India and USA would tend to become equal after the opening of trade between the two nations.

3. The following can be regarded as the two major differences between the traditional and the new trade theories

· Traditional trade theories are country based whereas the modern trade theories are industry or firm -based theories.

· The new trade theories suggests that the critical factor that determines the trade are based on the network effects whereas the traditional trade theory focus on the principle of comparative advantage as the major factor determining the amount of trade between nations.

4. While making comparisons between nations in the international trade, it has to be analysed from the perspective of whether the nation is more a capital intensive one or a labour intensive one. In the above case, USA is a more capital-intensive nation and hence is suited for exporting products like computers which requires less labour intensive works in their production whereas a country like Kenya would be more suited to export products like hides and skin since it belongs to a more labour intensive nation and since the above firms under reference are more labour intensive. This is in accordance with the Hecksher-ohlin theorem which states that a capital intensive nation exports goods which are more capital consuming and a labour intensive nation exports products which consumes mor labour force rather than capital requirements so that when the trade is opened between the nations, the price equalisation is obtained