Chapter 4 Flashcards
What is the Heckscher-Ohlin trade model?
aka factor proportions model
Relative abundance of different factors of production
Determine which country has a comparative advantage in which goods
What does the HO model consist of?
2 inputs
2 outputs
2 countries
Ratio of capital to labour
What is relative factor abundance?
Determines which goods a country will import and export
Relative scarcity means the opposite
How is relative factor abundance shown in the HO model?
Countries have a comparative advantage in the production of goods that use their relatively abundant factor
What is the recipe of steel and bread?
Steel is capital intensive
Bread is labor intensive
US is capital abundant so it had comparative advantage in steel
Why is PPC convex?
Opportunity cost increases when we produce more of one good since we are moving inputs that are less suited to the good with expanding output
There is incomplete specialization
How is the Stopler-Samuelson theory related to the HO model?
By analyzing how the changes in relative prices of output goods within the HO model affect the relative returns to f.o.p.
What is the Stopler-Samuelson Theorem?
Increase in price of good raises income of the factor used intensively in its production
Decrease in price of good lowers income of the factor used intensively in its production
ie. US returns on capital increase, wages fall
Canada returns on capital fall, wages rise
What is the income distribution in the short run?
Labour may be stuck in the sr since we assume they can move effortlessly between sectors
What is the specific factors model?
Special case of the HO model
3 factors - land, labour, capital
2 outputs - bread and steel
One specific to each output:
- bread is labour and land
- steel is labour and output
What happens after trade begins in the short run?
US Landowners - decline in demand for land, incomes falls
US Capital owners - increase in demand for capital, incomes rise
What is the resource curse?
The abundant endowment of a single valuable resource can crowd out other economic activities
Labour and capital become concentrated, it is hard to develop alternative industries
What is the gravity model?
Good predictor of trade partners and trade flows
- does not predict the products/service traded
- consistent with comparative advantage but does not rely on it as a concept
What is the gravity model of trade?
Amount of trade between two countries (attraction) is determined by their GDP (size) and how far goods travel (distance)
What is the product cycle?
Describes how production migrates from high income, advanced economies to middle income developing economies
Where is the early stage of production placed?
High income country
- need science and engineering skills to develop new product
- need high income consumers to try it out
Where is the middle stage of production placed?
Location shifts
- R&D process - design begins standardization
- mass production begins
- labor costs matter
Where is the late stage of production placed?
Moves where labour cost is low
- product completely standardized
How is the product cycle presented on a graph?
Upwards sloping then down after middle stage
Quantity on x axis
Time on y axis
Line is called production
Consumption line is upwards sloping
What are supply-push factors?
For people
Recession, long-run structural changes, wars, natural diseases
What are demand-pull factors?
For people
Probability of finding a job, wages, opportunities
