Boone kurtz expanded ppt ch10

The Stolper—Samuelson relation clarifies the theory of tariffs by permitting unambiguous conclusions about the effects of tariffs on the real incomes of factors.

The topics covered are the basic theoretical structures rather than applications or specialized developments. This analysis is not altered by the introduction of nontraded goods, since there is no presumption that these are closer substitutes for exported than for imported goods Johnsonchapter 7.

This is equivalent to supposing that there is but one factor of production, say, labor. Otherwise, devaluation can improve the trade balance only through its indirect effects in reducing demand—for example, by reducing the real stock of money through increasing domestic prices, by redistributing income toward those with a higher propensity to save, or by increasing the real burden of a progressive tax structure—and these effects may be unfavorable rather than favorable.

In other words, relative factor abundance gives rise to comparative advantage. Evaluation of the model.

The exception is the case where the technical change is strongly saving of the factor used relatively unintensively in the improved industry i. This result is applied to show that the owners of a certain factor may benefit from appropriate tariffs.

In the same potential welfare sense, it can be shown that free trade will maximize world income by equating the marginal values of commodities to all consumers and the marginal costs of production of goods by all producers.

These Boone kurtz expanded ppt ch10 of the Meade model, however, while valid for short-run analysis, abstract from the longer-run question of how national price levels are to be realigned so as to eliminate the need to rely on policy-induced international capital movements for the maintenance of international equilibrium.

It implies that even with similar tastes in the two countries, comparative advantage, as reflected in closed-economy equilibrium comparative-cost ratios, need not reflect relative factor abundance; and that, since more than one relative factor price may be associated with a given commodity price ratio, free trade with incomplete specialization in both countries does not necessarily imply factor price equalization and may indeed imply a greater divergence of relative factor prices than would exist in the absence of trade.

Economica New Series The monetary disorganization that immediately followed World War I not only produced the purchasing-power-parity theory but led to recognition of the possible conflict between internal stability and external stability inherent in the choice of either a fixed or a floating exchange rate and to analysis of the comparative merits of the two systems.

Let the index of the minimum cost process for the ith good be ki. Since the transfer shifts purchasing power from one country to the other, the question is simply whether its effect is to increase or decrease world demand for the exports of the country making the transfer.

This relationship is referred to as the Rybczynski theorem The normative concern is particularly dominant in the theory of the effects of tariffs and other governmental interventions in international trade—a perennial problem that has acquired new interest in the modern world of planned economic development based on protected industrialization and deliberate import-substitution.

Suppose the number of goods equals the number of factors, so that A is square. Nevertheless, it is a reasonable approximation for the analysis of short-run monetary disturbances of the type with which Cassel was concerned and provides a rough guide for policy-makers obliged to decide the magnitude of exchange-rate changes.

In other words, the strong Stolper—Samuelson theorem over an interval of factor prices implies the factor price equalization theorem over the same interval Chipman The relative version of the theory asserts that equilibrium exchange rates will change in proportion to changes in relative purchasing power, or equilibrium price levels in proportion to changes in official exchange rates.

But this apparent dilemma is resolved, once a distinction is drawn between the current account influenced by the level of income and employment and the capital account influenced by the level of interest rates of the balance of payments and it is recognized that expansion by fiscal policy tends to raise, and expansion by monetary policy to lower, interest rates.

Both of these involve elimination of tariff barriers to trade between the members and the retention of tariffs against outsiders, but a customs union entails unification of the national tariffs in a common schedule, whereas in a free trade area the members retain tariff autonomy.


The evaluation of gain or loss therefore necessitates interpersonal welfare comparisons, which must be excluded as illegitimate. Choose units so that initial prices equal one. The existence of the differences in comparative costs underlying international trade, however, was merely assumed and not explained by the theory.

The technique yields a number of propositions about the circumstances in which a customs union is likely or unlikely to increase economic welfare and also the proposition that preferential tariff reduction is more likely to be beneficial than complete free trade in such a union.

It is also the only direction of specialization consistent with competitive equilibrium in the absence of impediments to trade, such as tariffs or excise taxes. A more plausible argument is that in confining his calculations to labor and capital only, Leontief ignored the influence of third factors of production, such as natural resources, labor skill, or managerial ability, so that his results are not a fair test of the Heckscher—Ohlin theory.

The theory of international trade is the application of general value theory and monetary theory to a special case in which the microeconomic decision units households and firms are grouped into subunits countries or regions of the macro-economy differentiated from one another in the way just described.

Hence, at constant commodity prices, an increase in the quantity of a factor implies an increased output of the good that uses it intensively and a reduction in the output of the other good. The loss or gain accruing to a country as a result of short-run changes originating externally can be measured to a first approximation by the change in the commodity terms of trade multiplied by the value of imports.

The theory originated with Heckscher American Economic Associationchapter 13 but was significantly elaborated by Ohlin ; in its contemporary form it owes a great deal to analytical techniques and propositions contributed by Samuelson and elsewhere.

International Trade

The Ricardian theory of comparative advantage Vinerchapter 8 deals with this question, as do the Haberler theory of opportunity costs []chapter 10 and the Heckscher—Ohlin theory of comparative costs Ohlinchapter 2.

All such arguments except the optimum tariff argument are second-best arguments, in the sense that they recommend the introduction of a distortion in the competitive system to offset other distortions alleged or believed to exist in the investment market, commodity markets, or factor markets.CONTEMPORARY MARKETING by Boone and Kurtz has proven to be the premier principles of marketing text and package since the first edition.

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Boone kurtz expanded ppt ch10
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