Economics of International Trade - Effects of Increase in Capital - Case Study Example

Effects of increase in capital A large trading country An economy may have different levels of abundance when it comes to factors of production. For example, a country may have abundant manpower but little capital to make investments that will create jobs for the population. According to Heckscher and Ohlin, a country should export those factors that it has in abundance and import those that are not easily available within the economy. According to (Samuelson (2001) large trading country takes place in international trade with other economies and therefore there is almost an equal rate of export and import (Ashok & Jaffee 2004, p. 81). An increase in capital within such a country given that it already has capital as an abundant factor of production will not only have an impact on production but also other factors of production (McKenzie 1954, p. 166). The increase in supply of capital will lead to an increase in the rate of importation of other factors of production such as labor. This will come as a result of increased investment both at domestic and international level hence the need for other factors of production to improve productivity. The increase in capital will also lead to increased taxation by the government (Ashok & Jaffee 2004, p. 81). The increase in capital will also increase the scarcity of labor as a factor of production since the high capital gives room for increased investment (McKenzie 1954, p. 166). Economic growth wholly depends on two factors, the productivity and quantity of inputs. Such factors include capital and labor. There are several ways in which a country can increase its capital; this can be done by reducing the amount of tax charged on capital gains. There are other ways in which an economy can increase its amount of capital. An increase in capital may have several effects on the economy including labor and standards and living. Economic growth cannot take place unless the productivity or quantity of production factors increase (McKenzie 1954, p. 166). Keeping in mind that capital is factor of production then its increase is likely to result into accelerated economic growth (Ashok & Jaffee 2004, p. 81). An economy should therefore focus on ensuring that capital increases due to two reasons. One, if a company increases focus on capital investment, the amount of capital is likely to increase. Two, an increase in capital is likely to increase the level of labor productive since both labor and capital are productive compliments. The important link between economic growth and capital has been applied by multiple economies (Samuelson 2001, p. 1205). Therefore an increase in the amount of capital (assuming its double increase) plays a central role in increasing the rate of economic growth through labor productivity and enhancement of other factors of production. This effect will take place if capital is viewed as the scarce factor of production within the economy (Shiozawa 2009, p. 19). An increase in resources will give an economy to produce two commodities at the highest of quality and quantity (Samuelson 2001, p. 1205). Small trading countries In the case of small trading there are several debates around the globe whether financial globalization should be done to salvage developing countries from a quick change of economic standards. There has been a rapid capital increase from the 1980s which was followed by the sharp collapse of the same (Samuelson 2001, p. 1205). A small trading country with high capital abundance will try to export capital intensive goods and import labor intensive goods. If such a country encounters an increase in capital (double), then there is going to be a change in both economic growth and productivity. If the country used to produce goods x and y, then in order to increases the production of one good it has to reduce the production of the other (Ashok & Jaffee 2004, p. 81). An increase in capital will give the country the ability to simultaneously increase production of both goods (McKenzie 1954, p. 166). However, Based on H-O theory, the country will not have enough labor to carry out the extensive increase in production (Samuelson 2001, p. 1205). The country will have increased ability to generate capital intensive goods but decreased ability to produce labor intensive goods. Therefore the country will witness an increase at the rate at which they import labor intensive goods and export capital intensive goods (Samuelson 2001, p. 1205). A small trading company has minimum ties with the outside in terms of trade. Such a country exports less commodities and its level production is relatively low. Capital and labor are normally a great problem for such countries. In order to increase the production of one commodity, the government has to reduce the production of the product hey feel it is less important to the country (Samuelson 2001, p. 1205). Such a country does everything to ensure that it increases factors of production. An increase in capital will have a great impact on the country’s economy. A double increase in capital will give the country the ability to increase productivity and quantity of production for both commodities. This will happen as a result of productivity compliments (Samuelson 2001, p. 1205). An increase in capital will also have an impact on other factors of production such as labor. There are many ways in which a country can increase labor (Shiozawa 2007, p. 145). The country can import labor since it has enough capital to do so (Shiozawa 2009, p. 19). Therefore an increase in capital for such a country will help stimulate economic growth since all factors of production will be available (Samuelson 2001, p. 1205). An increase in the rate of investment as a result of increased capital will not only have an impact on the economy but also on individuals (Ashok & Jaffee 2004, p. 81). Increased investment will increase employment opportunities within the economy therefore giving individuals an opportunity to secure jobs (Samuelson 2001, p. 1205). Increased employment opportunities will greatly help in lifting individuals’ living standards (McKenzie 1954, p. 166). The Production Probability Frontier figure below shows the impact of change in factors (capital and labor) of production (assuming the two products produced by the country are guns and butter) Trade between the United States and Australia The United States and Australia have had a long standing trade agreement that has existed over five years. This trade agreement gives the two states the ability to trade with each other freely on certain commodities. Their association also extends past trade issues to other political and administrative issues. However, this paper will focus mainly on their trade arrangements and the commodities they trade. Australia is widely recognized for its successful mining industry that is believed to have played a central part in salvaging the country during the recently ended global economic recession. This trade agreement tries to ensure that both countries benefit in the trade. The United States is a capital intensive economy and therefore it is expected that it will export more capital intensive goods to Australia and other parts of the world based on The H-O theory. On the other hand Australia has a large population hence availability of labor (Ashok & Jaffee 2004, p. 81). The Heckscher-Ohlin theory stresses that an economy is likely to export produce from factors which it has in abundance and import products from factors which it has in scarce. Looking at the trade between the United States and Australia, the countries exchange both capital and labor intensive commodities. H-O theory believes that a country should not produce goods which they are efficient in their production. The trade between Australia and the United States prove this theory to be true to some extent. This is due to the fact that Australia has exported products which are abundantly available to the United States and imported those commodities that are needed but are not abundant in the economy (Samuelson 2001, p. 1205). However, there are certain aspects of the trade that disagree with this fact. This is also in line with the research by Wassily Leontief, the United States is believed to be a capital abundant economy therefore it is expected to export capital intensive commodities (Shiozawa 2009, p. 19). However, between its trades with Australia, the country exports some labor intensive commodities (Ashok & Jaffee 2004, p. 81). This proves that it is not a guarantee for a country to export those factors that it has in abundance (Shiozawa 2009, p. 19). In the case of United States, there are many factors that give it the potential to export both capital intensive and labor intensive commodities. The country’s internal rate of consumption is relatively high therefore most commodities that are manufactured are consumed within the economy (Shiozawa 2007, p. 145). The United States also has a high population that gives it the ability to manufacture both labor intensive and capital intensive commodities (Samuelson 2001, p. 1205). The high level of capital gives it the chance to carry out investments in all industries, the high population provides labor for these industries therefore increasing their ability to manufacture and export labor intensive commodities (Matsuyama 2000, p. 1096). The trade between United States and Australia can be termed as ‘strange’ as far as H-O theory is concerned. There are certain commodities which Australia imports and exports to the United States, some of these products are capital intensive (Ashok & Jaffee 2004, p. 81). This shows that United States being a capital abundant country, it still imports certain capital intensive commodities (Shiozawa 2007, p. 145). This is not in line with the Heckscher-Ohlin theory. However, despite this anomaly between the trade and the theory, the two tend to come into agreement when it comes to import and export of certain commodities (McKenzie 1954, p. 166). Australia is known for its flourishing mining industry, it exports a high number of minerals to the United States hence concurring with the concept that a country will always export what it has in abundance. Australia also exports a number of agricultural products to the United States since it is one of its booming industries. On the other hand, Australia imports telecommunication equipments from the United States of America (Matsuyama 2000, p. 1096). The United States is renowned for its technological superiority when it comes to manufacture of computers and other telecommunication devices with companies such as HP, Apple and Microsoft being among the leading technological companies around the globe (McKenzie 1954, p. 166). The mineral and telecommunication trade between the United States and Australia complete the Heckscher-Ohlin theory which stresses that a country should produce and export those factors that it has in abundance and import those factors that are scarce within (Samuelson 2001, p. 1205). The tables below show the items exported and imported by Australia from the U.S Looking at the business relationship between Australia and the United States there are certain aspects which are not in line with the H-O theory. The information above tries to explain the reason why United States is a capital intensive economy while it is able to export labor intensive commodities (Matsuyama 2000, p. 1096). There are many aspects surrounding the trade between the United States and Australia that even allow a country to import those commodities that are manufactured from the abundant factors (McKenzie 1954, p. 166). For example, Australia exporting new and used passenger motor vehicles to the United States. It shows that the type and level of consumers in the United States allow for such commodities to be imported (Samuelson 2001, p. 1205). Therefore when it comes to imports and exports between two countries, it is important to look at the consumer interest and internal rate of consumption (Ashok & Jaffee 2004, p. 81). Australia’s exports to the United States Meat products including poultry Wine & related products Semi-finished iron & steel mill products Items returned to U.S. then reimported Nickel Other scientific, medical & hospital equipment Industrial inorganic chemicals Medicinal, dental & pharmaceutical preparations Non-steel finished metal shapes New & used passenger cars Source (Suit 101 2011) USA’s Exports to Australia Materials handling equipment Civilian aircraft Medicinal equipment Minimum value shipments Excavating equipment Telecommunications equipment Pharmaceutical preparations Computer accessories Other vehicle parts & accessories Other industrial machines Source (Suit 101 2011) References Ashok, B. & Jaffee, D. 2004, “On Intra-Firm Trade and Multinationals: Foreign Outsourcing and Offshoring in Manufacturing” in Monty Graham and Robert Solow (eds.) McKenzie, W. (1954). "Specialization and Efficiency in World Production". The Review of Economic Studies 21 (3): 165–180. Matsuyama, K. 2000 A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade, Journal of Political Economy, 108(6): 1093-1120. Shiozawa, Y. 2007 A New Construction of Ricardian Trade Theory—A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques—, Evolutionary and Institutional Economics Review 3(2): 141-187. Shiozawa, Y. 2009, Samuelson's Implicit Criticism against Sraffa and the Sraffians and Two Other Questions, The Kyoto Economic Review, 78(1): 19-37. Samuelson, P.2001. "A Ricardo-Sraffa Paradigm Comparing the Gains from Trade in Inputs and Finished Goods". Journal of Economic Literature 39 (4): 1204–1214. Suit 101, 2011. Top Australian Exports & Imports: Most Popular Products Traded Between Australia & America accessed 7th September 2011 fromhttp://daniel-workman.suite101.com/top-australian-exports-imports-a30880 Read More