L2: Globalisation, Employment and Wages Flashcards
key message of the HOS model
opening up to trade is a good thing for welfare
international trade generates a net gain for all counties (as in Ricardo), but within a country, there are winners and losers: winners win more than losers lose which is why overall, it’s good (more gains than losses)
assumptions of HOS model
2 countries 2 goods 2 production factors (labour and capital) identical production technologies different capital intensities different relative factor endowments constant returns to scale perfect competition identical and homogenous preferences
a country is capital-abundant if
(K/L) of country A > (K/L) of country B
a country is labour-abundant if
(L/K) of country A > (L/K) of country B
a good is capital-intensive if
(K/L) of good A > (K/L) of good B
a good is labour-intensive if
(L/K) of good A > (L/K) of good B
HO theorem
a country exports the good using intensively the factor it has in relative abundance
Stolper-Samuelson theorem
the factor that is abundant in a country will benefit from opening up to trade, and the factor that is scarce will lose from trade
factor price equalization: the HOS theorem
free trade of goods equalizes relative incomes of factors between the two countries through the equalization of relative goods’ prices
the limits of factor price equalization
transport costs are large in a lot of industries
trade barriers such as tariffs and quotas persist
distortions of all kinds are pervasive
technologies are not really identical
Leontif paradox
US exports should be capital-intensive and imports labor-intensive but in reality, US exports are labour-intensive and imports are capital-intensive (assumption that the US is capital-intensive)
HOS reformulated as Heckscher-Ohlin-Vanek
a country will export the services of a factor when its share in world endowment of this factor exceeds its share of world GDP (demand in fact)
Rybczynski theorem
changes in an endowment affects output of goods when full employment
