Free Essay

Joint Ventures

In: Business and Management

Submitted By madde05
Words 1562
Pages 7
7.8

The Hecksher-Ohlin proposition is, simply put, two countries producing two goods and having two factors of production (2*2*2). The differences between the countries’ factor endowments result in comparative advantages when trading, assuming universal production technology and no trade restrictions. What’s also assumed is a CRS production, perfect competition and an equal demand in the the two countries.

Looking at the export statistics from 1998 and more recent years, and comparing the countries of Turkey and Sweden, the goal is to decide whether the export patterns are in accordance with the Hecksher-Ohlin theorem. We chose to look at these two countries because, when looking at the excel file with differences in resources used for production, there was a big difference between Sweden and Turkey. Because of this, we thought it would be good economies for showing the differences when it comes to what and why a country uses what it does, in terms of resources, when producing.

According to the data on the exports from countries from 1998, there is quite a large difference between Sweden and Turkey in terms of what kind of resources the products they export use. Turkey’s biggest export was unskilled labor intensive products, whilst Sweden mostly exported technology and human-capital intensive products. Looking at the table on the bottom of the page, one can see how big of a difference there is between Sweden and Turkey when it comes to the difference in resources used for the export products.

Sweden USD million Turkey
Primary products 7080 (9,3%) 5344 (20,3%)
Natural resource intensive products 2759 (3,6%) 1024 (3,9%)
Unskilled labor intensive products 5442 (7,2%) 11848 (45%)
Technology intensive products 34990 (46,2%) 2565 (9,7%)
Human capital intensive products 25480 (33,6%) 5531 (21%)
Total 75751 26312

We’ve chosen to look at the differences in capital and labor, as these are the two factors used in the Hecksher-Ohlin model. One can see from the data of the labor force on the website www.worldbank.org, only 8% of the total in Turkey has tertiary education, while in Sweden the percentage was 27%. Also, in Sweden, the amount of people with primary and secondary education was 22% and 50% respectively, whilst in Turkey it was 74% and 18%.

GDP per capita, PPP, in Turkey 1998 was 13,000 compared to 33,709 in Sweden.This shows that Sweden had a higher income per capita than Turkey, resulting in the workforce in Sweden being more expensive than the one in Turkey. Also, more people in Sweden has a higher education, meaning they are able to demand more money for the work they perform, contributing to the fact that Sweden is not what you call a labor intensive country.

Turkey, on the other hand, has not got as many tertiary educated people, as investing in education takes a lot of money and they do not have as much capital as Sweden. As they do not have a very high level education they need to take any job they can get. The population were (and still is) much greater in Turkey than in Sweden, which mean that it’s harder for Turkish people with no education to find a good job, as they compete with so many others. Therefore they might have to accept a low salary since that’s the only thing they can use to compete with, if they can’t compete with their level of education, like Sweden can. This leads to the salaries being pressed downwards and there being an abundance of labor, whack makes Turkey a labor intensive country.

The Hecksher-Ohlin proposition holds, we’d say, as it’s possible to see that labor abundant Turkey had a very high export of unskilled labor intensive products. Sweden, on the other hand, had larger exports in technology and human capital intensive ones, which demand a lot of capital and investments in education and new and useful technology. These are both expensive factors, and if a country do not have the capital to invest in them. They simply do not have a choice but to put their labor force in the production of products which are abundant in other factors than those that demand capital, and then trading with the country which can produce what they can’t cheaper, in relative prices. This results in both countries being able to focus on the production of the good in which they have a comparative advantage in, depending on their different abundances of factor endowments.

8.10 A) We can start by looking at the graph and concluding that Zombio is a small country. The world price of tractors is not effected by the tariff, as would have been the case if the country was considered a large one. The total income loss by setting the tariff is equal to 1 (drops from 4,6 to 3,6), shown by the new income line on the horizontal axis.

The group that benefits the most from the introduction of the tariff is the domestic producers. A rise in the relative prices of tractors leads to an increase in the domestic production and therefore the profits for the domestic producers increases, since both prices and quantity increases.
Another group also benefitting from the tariff is the government, who increases their income by the fact that the tariff generates an income for them.
Pm/Pf Pm(1+t)/Pf
Production of tractors increases because the relative price of tractors rises, whilst there being a simultaneous reduction in production of coffee, which represents the opportunity costs of trade restrictions, meaning that the extra resources used for tractors has to come out from somewhere, in this case the production of coffee. 4,6 3,6

B) Terms of trade is a measure of a country’s relative competitiveness. It can be seen the amount of import goods an economy can purchase per unit of export goods. The terms of trade is calculated as exports divided by imports.

For Zombio, the higher price of tractors, which they import, leads to a deterioration in their terms of trade, as can be seen in the graph and also if you look at the export goods’ price divided by the import goods’ price and comparing previous price of tractors compared to the new one:
Coffe/Tractors —> Before change: 1 / 1,2 = 0,833 —> After change: 1,2 x 1,10 (because of the 10% higher price) = 1,32 1 / 1,32 = 0.76
This shows that Zombio can’t buy as many tractors as they previously did, with their current export of coffee. They don’t get as many units of import per unit of export.

C) Both utility and income decreases even further. Utility lowers as consumption lowers. Domestic price level deviates from the point where they can trade with the rest of the world, leading to a suboptimal production, which means an income loss and reduces the welfare level.

D) The change in factor endowments means the country can no longer produce the same quantity as before. However, the price doesn’t change, causing Zombio to produce a lower quantity than the demanded quantity of tractors. This results in the country being forced to import more tractors and export coffee.

E) When the demand for coffee increases, people spend more of their salary to buy coffee, resulting in a decreasing demand for tractors.The volume of trade decreases (?) because of the larger consumption of coffee leads to less people demanding tractors at the same amount as before, and therefore Zombio doesn’t need to import as many as they did before.

9.6 A) If profit maximizing firms believe they are facing a higher elasticity of demand abroad than at home, and it is able to discriminate between foreign and domestic markets, then it will charge a lower price abroad than at home. By doing so, firm B might be able to get bigger market shares than company A on the market in A’s country.

B) Firm B can lobby the politicians in the country of both firm A and B to reduce the transportation costs. They can also try to convince the state to subside the production in order to increase exports. Company B can also try to convince the state to spend more money on infrastructure and convince the government in the country of firm A that the welfare gains that go hand in hand with the introduction of the product are sufficient.

C) By reducing the transportation costs for company B, (TC) decreases, which enables B to set a lower price than before P=(a+b+Tc)/3. This is, however, dependent on by how much the new road lowers the transportation costs. Company A’s quantity is reduced because of the price reduction caused by the reduction of transportation costs. The output for firm B increases, as does the total output (A+B). This leads to firm B gaining market shares in the country of firm A.

D) The consumers gain from the reduction. They will now be able to buy more goods at a lower price than before, and therefore maximizing their utility. The ”losers” in this case will be company A, who will suffer from lower profits. Firm B will gain from from this along with the consumers, as their profits will increase and market share will expand.

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