2.2: factor proportions trade theory Flashcards
what is comparative advantage the result of in factor proportions theory
comparative advantage is the result of differences across countries in the proportions of those factors and the fact that industries use them in different proportions (intensities)
what is a couple of differences between ricardian trade theory and factor proportions theory
ricardian: labour key factor, comparative result of differences in technology which determine productivity,
factor: several factors of production, comparative result of differences in proportions of factors and that diff industries use in different intensities
what is T (terre), what is its price and where is this determined
land,
rent (r),
determined with wages as well in national factor markets
what is the condition for home to be relatively labour abundant
L/T>(L/T)*
home has an advantage in producing cloth with is labour intensive, what happens after free trade is allowed (factor proportions)
relative price of cloth pc/pf lower at home,
with trade, demand for cloth greater than before,
C producers increase demand for both L and T,
these factors come from F industry
why does moving to free trade in factor proportions push up the wages for home
home now produces just C, C producers increase demand for both L and T which comes from F sector,
for each unit of F not produced, relatively more land than labour released (because of the proportions used in F prod),
BUT C uses relatively more labour than land,
there is excess demand for labour so its price (w) rises until both factors once again fully employed,
wt up rt down and factor ratio (wt/rt) up,
after trade both C and F less labour intensive and more land intensive than before
what is the Heckscher-Ohlin theory
an economy has a comparative advantage in producing goods that are relatively intensive in using its relatively abundant factor of production
what happens after the relative increase in the price of a good (C in ex)
increase real return to the factor of production used relatively intensively in the production of that good (L in example of C),
real return to other factor (T in ex) will be reduced
who benefits with greater free trade in factor proportions theory
free trade benefits the abundant factor and harms the scarce factor
what is factor price equalisation theorem (factor proportions)
assuming same technology,
trade increases demand of goods produced by relatively abundant factors,
this indirectly increases demand for these factors, raising their relative prices,
trade equalises absolute and relative good prices and hence factor prices
what are some restrictions of HO model
transportation costs matter,
other barriers to trade (tariffs, subsidies and quotas),
many goods are not traded,
different technologies
talk about the identical technologies assumption for HO
fairly plausible if focus on rich countries,
not plausible when looking at North-South trade for instance
if production function is Y=F(K,AL) Y=F(T,AL) as opposed to just labour what does the HO model predict
HO predict convergence of K/AL or T/(AL) not of K/L or T/L,
real wages may still vary substantially after trade
if there are now two specialised factors of production. Qf=F(T,Lf) but now Qc=F(K,Lc) what happens
because of labour mobility -> wages in equilibrium the same w=pcMPLc and w=pfMPLf,
nominal wage=value of mg. product of L
why is the real wages in units of cloth lower than before after a rise in pc (2 good 3 factor)
real wage: w2/pc2 is equal to the marginal product of labour (not value) which has gone down,
because of diminishing returns - using more workers in cloth sector than before so marginal return (extra units of cloth) lower than before 58/61
