chapter 3 Flashcards
implied that international trade
makes every individual better off.
The Ricardian model
Two main reasons why international trade has strong
effects on the distribution of income within a country:
- Resources cannot move immediately or costlessly from
one industry to another. - Industries differ in the factors of production they use
Short-run consequences of international trade
Resources cannot move immediately or costlessly from one industry to another
Long-run consequences of international trade
Industries differ in the factors of production they use.
allows trade to affect
income distribution.
specific factors model
Assumptions of the Specific factor model:
Two goods, cloth and food.
Three factors of production: labor (L), capital (K) and land (T
for terrain).
Perfect competition prevails in all markets.
Cloth produced using capital and labor (but not land).
Food produced using land and labor (but not capital).
Labor is a mobile factor that can move between sectors.
Land and capital are both specific factors used only in the
production of one good
In specific factor model, there are two specific factors ________ which are permanently tied to particular sectors
(land and
capital)
Economists usually think of factor specifity as a matter of______
time
T or F
In specific factor model there is also no clear distinction between mobile and specific factor.
T
Who said that a displaced worker who is re-employed in a different occupation suffers an 18% permanent drop in wages (on average), while only 6% drop if he does not switch occupations.
Kambourov, Manovskii (2009) –
The production function is
upward-sloping and what shape
concave
T or F
In SFM, Capital is relatively more mobile factor than labor
F_ labor is relatively more mobile factor than capital.
The shape of the production
function reflects the law of
diminishing marginal
returns.
Adding one worker to the production process (without increasing the amount of
capital) means that each worker has less capital to work with
law of
diminishing marginal
returns
Because of the ________, each additional unit
of labor adds less output
than the last.
law of
diminishing marginal
returns
The marginal product of labor therefore _________ as more
labor is used.
declines\
indicates the allocation of labor.
Lower left quadrant
quadrant shows the production function for cloth
Lower right
shows the corresponding production function for food.
Upper left quadrant
indicates the combinations of cloth and food that can be produced
Upper right quadrant
Why is the production possibilities frontier curved?
- Diminishing returns to labor in each sector cause the opportunity
cost to rise when an economy produces more of a good - Opportunity cost of cloth in terms of food is the slope of the
production possibilities frontier – the slope becomes steeper as an
economy produces more cloth.
T or F
In each sector, employers will minimize profits by demanding labor
up to the point where the value produced by an additional hour
equals the marginal cost of employing a worker for that hour.
F_maximize
T or F
The two sectors must pay the same wage because labor can
move between sectors.
T
t or f
If the wage were higher in the
cloth sector, workers would
move from making cloth to
making food until the wages
become equal
F_ move from making food to
making cloth
T or F
At the production point,
the production
possibility frontier must
be tangent to a line
whose slope is minus
the price of cloth
divided by that of food.
T
What happens to the allocation of labor and
the distribution of income when the prices of
food and cloth change?
Two cases:
1. An equal proportional change in prices
2. A change in relative prices
When both prices
change in the same
proportion, ______
changes occur.
no real
The wage rate (w) rises
in the same proportion
as the prices, so real
wages (i.e., the ratios
of the wage rate to the
prices of goods) are
________
unaffected
What will happen to the real incomes of
capital owners and
landowners when an equal proportional change in prices happen
The real incomes of
capital owners and
landowners also remain
the same
When only PC
rises, labor shifts from the
food sector to the
cloth sector what will happen to the output of cloth and food
Cloth output Rises
Food output falls
T or F
The wage rate (w)
does not rise as much
as PC
T
What is the economic effect of this price increase on the
incomes of the following three groups?– Workers, owners of capital, and owners of land
Owners of capital are definitely better off.
* Landowners are definitely worse off.
* Workers: cannot say whether workers are better or worse
off:
Trade benefits the factor that is specific to the ______ of each country, but hurts the factor that is specific
to the ______
export sector, import-competing sectors.
Trade has ambiguous effects on
mobile factors
Trade benefits a country by
expanding choices.
Governments usually provide a ______of income support to cushion the losses to groups hurt by trade (or other changes).
“safety net”
Trade shifts jobs from ______sectors to ____ sectors.
import-competing to export
What is primarily a macroeconomic problem that rises during recessions.
Unemployment
Workers migrate to wherever wages are ____
highest.
International trade often has strong effects on the ______within countries - produces losers as well as winners.
distribution of income
Income distribution effects arise for two reasons
Factors of production cannot move costlessly and quickly from one industry to another.
Changes in an economy’s output mix have differential effects on the demand for different factors of production.
Real wages fall due to _____and rise due to ____
immigration , emigration
is a general model
that includes Ricardian, specific factors,
and Heckscher-Ohlin models as special
cases.
Standard trade model
Standard trade model is a general model
that includes
Ricardian, specific factors,
and Heckscher-Ohlin models as special
cases.
Assumption of standard trade model
Two goods, food (F) and cloth (C).
Each country’s PPF is a smooth curve.
Differences in labor services, labor skills, physical
capital, land, and technology between countries
cause differences in production possibility
frontiers.
Standard Trade Model
A country’s PPF determines its
relative supply function.
determine a world relative supply function, which along with world relative demand determines the equilibrium under international trade.
National relative supply functions
What a country produces depends on the relative
price of cloth to food PC
/PF
Standard Trade Model
______represents combinations of
cloth and food that leave the consumer equally well
off .
An indifference curve
Characteristics of IC
are downward sloping
that lie farther from the origin make consumers more
satisfied
become flatter when they move to the right
Characteristic of IC that states if you have less cloth, then
you must have more food to be equally satisfied.
are downward sloping
characteristics of IC - they prefer having more of both goods.
that lie farther from the origin make consumers more
satisfied
what happens with indifference curve with
more cloth and less food, an extra yard of cloth
becomes less valuable in terms of how many calories
of food you are willing to give up for it
become flatter when they move to the right
is based on preferences and relative price of goods
Consumption choice
T or F
An economy that exports cloth is better off when the price of cloth falls relative to the
price of food
F_ rises
T or F
A higher relative price of cloth means that
more calories of food can be imported for
every yard of cloth exported.
T
The ______refers to the price of exports
relative to the price of imports.
terms of trade
When a country exports cloth and the relative
price of cloth increases, the terms of trade______
rise.
A_________ for exports means
that the country can afford to buy more imports, an
increase in the terms of trade increases a country’s
welfare.
higher relative price
T or F
A decline in the terms of trade increases a
country’s welfare.
F_ Decreases
it occurs in one sector
more than others, causing relative supply to
change.
Growth is usually biased:
In_____ technological progress in one
sector causes biased growth.
In the Ricardian model,
In_____ model, an increase in one factor of
production causes biased growth.
In the Heckscher-Ohlin
Biased growth in the cloth industry (in either the home or
foreign country) will _______ the price of cloth relative to the
price of food and ______the terms of trade for cloth
exporters
lower, lower
Biased growth in the food industry (in either the home or
foreign country) will _____ the price of cloth relative to the
price of food and _____the terms of trade for cloth
exporters.
raise, raise
is growth that expands a country’s production possibilities dispro-
portionately in that country’s export sector.
Export-biased growth
is growth that expands a
country’s production possibilities dispro-
portionately in that country’s import sector.
Import-biased growth
reduces a country’s
terms of trade, reducing its welfare and
increasing the welfare of foreign countries
Export-biased growth
Iincreases a country’s
terms of trade, increasing its welfare and
decreasing the welfare of foreign countries
Import-biased growth
are taxes levied on imports
Import tariffs
are payments given to
domestic producers that export.
Export subsidies
drive a
wedge between prices in world markets and
prices in domestic markets.
Import tariffs and export subsidies
When the home country imposes an _____, the terms of trade increase and the welfare of the country may increase.
import tariff
When the home country imposes an _____, the terms of trade decrease and the welfare of the country decreases to the benefit of the foreign country.
export subsidy
The standard trade model predicts that
an import tariff by the home country can increase domestic welfare at the expense of the foreign country.
an export subsidy by the home country reduces domestic welfare to the benefit of the foreign country.
_____ on a good decrease the relative world price of that good by increasing relative supply of that good and decreasing relative demand of that good.
Export subsidies
_______on a good decrease the relative world price of that good (and increase the relative world price of other goods) by increasing the relative supply of that good and decreasing the relative demand of that good.
Import tariffs
depicts different possible combinations of current output and future output.
intertemporal production possibility frontier,
is intertemporal trade, where countries with profitable investment opportunities borrow funds today and repay lenders in the future, benefiting both borrowers and lenders.
International borrowing and lending
In addition to differences in labor productivity, trade
occurs due to differences in
resources across countries.
argues that trade occurs
due to differences in labor, labor skills, physical capital,
capital, or other factors of production across countries.
Heckscher-Ohlin theory
assumptions in Heckscher-Ohlin
Model
Two-Factor Heckscher-Ohlin
Model
Two countries: home and foreign, both have the same
technology
Two goods: cloth (C) and food (F).
Two factors of production: labor (L) and capital (K).
The mix of labor and capital used varies across goods.– cloth is labor-intensive and food is capital-intensive
The supply of labor and capital in each country is constant and varies across countries.
In the long run, both labor and capital can move
across sectors, equalizing their returns (wage and
rental rate) across sectors.
If producers can substitute one
input for another in the
production process, then the PPF
is
curved (bowed).
When the economy devotes
more resources towards
production of one good, the
marginal productivity of those
resources tends to be low so
that the opportunity cost is .
high
a line representing a
constant value of production, V = PC QC + PF QF
isovalue line
Production of cloth is
relatively _ intensive,
while production of food is
relatively _intensive.
labor
capital
If the
relative price of a good increases, then the
real wage or rental rate of the factor used
intensively in the production of that good
increases, while the real wage or rental rate
of the other factor decreases.
Stolper-Samuelson theorem
Any change in the relative price of goods
alters the distribution of income.
Stolper-Samuelson theorem
If you hold output
prices constant as the amount of a factor of
production increases, then
– the supply of the good that uses this factor
intensively increases and
– the supply of the other good decreases.
Rybczynski theorem
t or f
Trade in the Heckscher-Ohlin
Model
the countries are assumed to have the same
technology and the same tastes.
t
The country
that is abundant in a factor exports the
good whose production is intensive in that
factor
Heckscher-Ohlin theorem:
The Heckscher-Ohlin model predicts that
– owners of relatively abundant factors will gain from trade
(skilled labor in USA)
– owners of relatively scarce factors will lose from trade
(unskilled labor in USA
t or f
Unlike the Ricardian model, the Heckscher-Ohlin model
predicts that factor prices will be equalized among
countries that trade
t
