Factor Abundance

Question 1

what does the edgeworth box show?

Answer 1

It consists of two diagrams, one for each sector where we have K on Y-axis and L on X-axis and then we have graphs that show the isoquants for each sector. We then flip on diagram 180 degrees and find an equilibrium for efficient production.

Question 2

What does a higher isoquant imply?

Answer 2

Higher production value

Question 3

In equilibrium we have full employment, what does that mean?

Answer 3

It means that we are using all endowments in production

K=K(m) +K(T) and same for L

Question 4

What is the contract curve?

Answer 4

It shows all the points where the isoquants are tangent and therefore have efficient production.

Question 5

What does efficient production mean?

Answer 5

It means that we have two isoquants that are tangent, meaning that the ratio of the marginal products ae the same.

Question 6

How do we find out what the k is?

What diagram do we use?

Answer 6

The Lerner diagram.

If we know what the good prices are and what the factor prices are, then we can calculate the capital-labour ratio.

Question 7

in the Edgewoth box, how will the k go and why does it atter?

Answer 7

k will go from origo of the two sectors and where they cross is where we have efficient production

Question 8

What happens to production and endowments if the a good price changes? (assume P(t) increases)

Answer 8

If price of textiles increases, it will be profitable for the intensice factor of production (L) meaning that the wages will increase, this leads to the unit value isocost (w/r) increasing and a k (K/L) incresing. This will lead to a new equilibrium where we produce more of textiles.

“there is a desire to produce more of the labur-intensice good (T) and this raises the demand for labour and lowers the demand for capital.

Question 9

What happens if we have changes in factor endowments? (assume change in L)
Short and long term

Answer 9

Short term: Lerner diagram
L increases > temporary flattening of unit value isocost (w/r) > profit opportunities arise in labour intensice industry T and T expands >Ecpansion until profits are zero in both industries meaning that the uv isocost gets the same slope again.

long term: Edgeworth box
the box will be extended and a new k (K/L) will go from there

Question 10

What does the Rybczynski theorem say?

Answer 10

“An increase in the supply of a factor will lead to an increase in the output of the comodity using that factor intensively and a decrease in the output of the other commodity.

Question 11

In what setting should we think about Ryb. theorem?

Answer 11

For a small open economy beacouse in a closed or large economy a change in factor endowents likely affect the factor prices.

Question 12

What does the magnification effect in space say?

If L increases, how does one see the magnification effect in a graph?

Answer 12

That if the change in L is larger than the change in K (which is unchanged), then the labour intensive T will change even more and M will decrease
The change in L will be distance between old and new L.
The change i T will be the distance between the equilibriums (width). Change in M will be the distance in between the equilibriums in height.

Question 13

What graph do we use to factor abundnce equilibrium in autarky?

Answer 13

We use the Production possibility frontier

Question 14

How is the PPF curved

Answer 14

Since this production uses two factors of production the curve will be -(change in M/change in T) and it will be scewed depending on factor intensities.

Question 15

How do we find equilibrium in the PPF for the production in autarkty?

Answer 15

equilibrium will be where the relative price= change in M/T=MRT, where the PPF and the relatice price are tangent!

Question 16

What are the links between the PPF and the contract curve?

Answer 16

Each point on the PPF correspeonds to a specific pont in the contract curve. (all points on PPF are efficient)

Question 17

What happens with PPF when factor endowments change (assume increase in L)?
What is the Rybczynski line?

Answer 17

L increases: Since both goods use L, both intercepts will increase, though T (L intensive) will increase even more which will lead to a new equilibrium where production is intensive in producing T.
The Rybczynski line is a line between the old and the new equilibrium and shows how output changes with changes in factor endowments holding good prices constant.

Question 18

What does it mean to have identical and homothetic preferences?

Answer 18

Homothetic preferences: as income increases, consumption increases proportionaly

Question 19

How do we find the demand of the goods?

Answer 19

Graph with M and T ont he axis’. We have a straight line fro origo representing identical and hoothetic pref.
Budget constraint: I=P(m)M+P(t)T
Indiffrence curves: MRS
Consumer opt: MRS=P(t)/P(m)

Question 20

How do we find the autarky equilibrium for a country?

Answer 20

Producer opt, consumer opt and market clearing (full employment and everything is bought)

MRS=MRT=P(t)/P(m) This will be equilibrium for a market.

Question 21

What is the physical definition of factor endowments?
what is the factor price definition of factor endowments?
When will the physical del and factor price def be the same?

Answer 21

Physical:
it is comparing the k (K/L) between countries and seeing which is higher (cap abundant)

Factor price:
Comparing the w/r ratios (in autarky) between countrys
(higher=cap abundant)

They will be same if we have identical demand patterns.

Question 22

What happens if the countries don’t have identical demand patterns?

Answer 22

Then it could be that one country has a demand bias towards the good that they have a comparative advantage in anf the factor prices will not reflect factor abundance.

Question 23

How do we determine factor endowments of two countries? (2 diffrent graphs)

Answer 23

Lerner diagram: Each country has graphs of the max amount of poduction for each good. Where they cross is where the k slope will go through. The coutry with the steeper k will be cap. abundant (if K is on Y-axis)

PPF:
Each country has a MRT curve where the two intercept show the max production of each good. We find MRS=MRT and through that find the relative price (higher P => cap. abundant)

Remember: same indiffrence curves for both coutnries!

Question 24

How will trade in the H-O model look?

Answer 24

PPF: With trade, the prices will equalize giving the same world prices.
We will get trade triangles that show the volume of trade: they should be identical in order to have balanced trade.

Identical demand: the relative consumption of the two goods will be the same in Foreign and Home.

Question 25

Empirics HO model?

Answer 25

Leontiefs pradox: not in line with H-0
why? demand bias, not balanced trade
Vanek: not enough production factors

Question 26

What is the Armington assumption?

Answer 26

We are biased towards domestically produced goods