II. A closer look at international trade
A. Factor endowments and international trade
4. Real world applications

Sum up (redo opinions)

• HO is the oldest and most complete trade model
• Makes lots of predictions about how trade plays out in the real world
• However, it leaves some holes to fill

? per HO, which of the tradeflows in the table below should be most common?

    HO predicts lots of trade between countries with very unequal factor endowments
    Ex: US should have little trade with EU and much with Africa.

Draw pie charts of export destinations for DCs and LDCs

    Clearly, there seems to be lots more going on than HO trade.
    For DCs: most trade may not be HO
    For LDCs: most trade may be HO

• From US perspective: Most US trade must be something other than HO
• Other trade models help us get a more complete picture--they are not contending models; they are complementary models that coexist with the HO model itself
• 2 other main types of trade models:
      (1) technology-based trade: drops the HO assumption that all countries have access to the same technology
      (2) market structure-based trade: drops the HO assumption of perfect competition

B. Technology and trade
    (technology-based models and gains from trade)

1. The product cycle trade model

    Relevant economists:
    --Staffan Linder. An essay on trade and transformation, 1961.
    --Raymond Vernon (online). "International trade and international investment in the product cycle," Quarterly Journal of economics, May 1966.

    Focuses on technological differences
    Especially useful in explaining trade between DC's

    Established products follow HO model.
    But HO is a static model
    Many markets are dynamic due to the development and diffusion of new products and production techniques
    Key difference versus HO: technologies differ across countries

    Step 1: Invention of a new product tends to occur near its market
    Real-world implication: mainly DCs--due to both supply and demand conditions
    ? What factor supply conditions? 
    abundance of R&D resources

    ? What demand conditions?
    Consumer goods: more discretionary income
    Producer goods: pressure for labor-saving innovations

    Step 2: Production also tends to begin near the market
    ? Why?
    Keeps information and feedback costs low for fine tuning
    Real-world implication: even labor-intensive new goods get produced in DCs

    Step 3: As the market matures, production settles at lowest cost location
    Real-world implication: HO applies for mature products.

    Ex: aircraft stayed, calculators left
    Jet engines developed after WWII
    Calculators started with HP in US, then Sharp in Japan, now LDCs

    Technolgy-based trade tells a nice story. It helps us understand the pattern of trade, in particular among industrial countries

    Supplements HO.
    Focuses on dynamic comparative advantage
    --we have an abundance of R&D skills, so we have a C/A leading edge goods.

    Trade gain #1: Trade promotes efficiency due to specialization based on factor endowments.
    Trade gain #2: Trade provides access to new products from around the world
    Import ah-so's, export high-yield grains

2. Technology, trade and growth

    Product cycle illustrates how a country's technology can stimulate trade
    The reverse is true too--trade can stimulate a country's technology and growth

Endogenous growth models-- trade can raise not only the LEVEL of a country's income, but also the RATE OF GROWTH of the country's income     --plot time against real GDP/capital     Growth path (1): without endogenous growth     Why?     --Provides access to new technology:     Ex1: bring a cookie to class--autarky vs. trade     How many cookies will you end up with if you trade? 1     Ex2: bring a new study tip to class--autarky vs. trade     How many new study tips can you end up with if you trade? n (= number of students in class)

    Technology is a public good--everyone can benefit from anyone's new ideas. 
    Trade promotes the exchange of new ideas

    Examples: US revived textiles with technology imported from EU
    Sweden built a robotics industry with technology imported from Japan
    Impact: faster technological change due to 
    --knowledge spillovers (proliferation of new ideas)
    --larger global market => higher profits for new products 

    growth path (2): with endogenous growth

    Trade gain #3: Trade can increase growth by accelerating the development and diffusion of new technology