assumptions Flashcards
Ricardian model
- Labor is the only factor of production (moves freely from one industry to the other)
- Labor productivity varies across countries (differences in techno) and is constant in each country
- Supply of labor in each country is constant
- 2 goods
- P=MC and workers go where wages are the highest
- 2 countries
Specific factor
- Perfect competition in all market
- 2 goods
- 1 mobile factor (labor)
- 2 specific factors used in production of 1 good
- Mobile/specific depends on time spell
Heckscher-Ohlin
- 2 countries
- 2 goods
- 2 factors of production
- mix of L and K varies across goods
- Supply of L and K is constant and varies across countries
- All factors are mobile: In LR, L and K can move across sectors, equalizing their returns (w,r) across sectors
Standard trade
- 2 countries
- 2 goods
- Each country’s PPF is a smooth given curve TT
- Countries can have different PPF (differences in labor endowments, skills, etc.)
- Country’s PPF determines its relative supply fct
- National relative supply fct determine a world relative supply fct, which along with world relative demand determines the equilibrium under international trade
An economy that EX c is better off when the price of c … relative to the price of f
Increase
- steeper isovalue line; higher indifference curve
- can afford to buy more IM
- increase ToT
Growth-biased
Export-biased growth:
Worsen ToT to the benefit of RoW
increase production
increase income
increase consumption
decrease relative price
ToT decreases for home
Import-biased growth:
Improves ToT at the cost of RoW
International effects of growth:
EX-biased growth in the RoW improves our ToT, while IM-biased growth in RoW worsen our ToT
IM tariff
IM f;
Pf increase; Pc/Pf decreases
Producers at home:
Increase Qf, decrease Qc; Rs C decreases
Consumers at home:
As pf increases; Df decreases, Dc increases; Rd C increases
World relative price increases (Pc/Pf)
Home ToT increases at foreign’s expenses
Heschker-Ohlin ; Effect of increase in relative price
when relative price increase, w or r of the factor used intensively in the production of the good increases, while the other factor decreases
If c is labor intensive;
increase Pc/Pf; increase w/r for both goods; Lc/Kc decreases (see graph, no substitution)
Heschker-Ohlin change in relative price effect on income distribution
Changes in relative prices have strong effects on income distribution. Owners of one factor of production gain (labor here) while owners of the other factor of production (capital here) are worse off.
Gains from trade (Ricardian)
- Expand consumption possibility
- Act as an indirect method of production
Misconceptions about comparative advantage
- “Free trade is beneficial for a country only if it is more productive than foreign countries.”
- high cost derived from inefficient use of resources
2.“Free trade with countries that pay low wages hurts high-wage countries. Foreign competition is unfair.”
-wage rates depend on countries different relative labor productivities across industries.
- “Free trade exploits less productive countries whose workers make low wages.”
-Consumers benefit from free trade by having access to efficiently produced goods.
-Producers/workers benefit from having higher profits/wages—higher compared to the alternative.
International trade has strong effects on the distribution of income within a country because:
(Specific factor)
-Resources can’t move immediately and without a cost
-Industries differ in the factors of production they demand in the LR
Allocation of labor (specific factor)
Labor can move between sectors and will be mobile until both sectors pay the same wage.
Labor is allocated so that the value of its marginal product (P × MPL) is the same in the cloth and in the food sectors.
2- Change in relative prices (increase only in the price of cloth)
(Specific factor)
increase Pc;
IN C SECTOR:
workers are worse off real wage decrease
capital owners income go up
IN F SECTOR:
workers are better off; real wage increase
landowners income go down
The factor specific to the sector whose relative price increases is definitely better off
The factor specific to the sector whose relative price decreases is definitely worse off
The change in welfare for the mobile factor is ambiguous.
The Heckscher-Ohlin theory argues that trade occurs because:
- Countries have different relative abundance of factors of production (endowements)
- Production of goods uses factor of production with different relative intensity depending on thechnology (factor-proportions theory)
