T3: Trade and Resources Flashcards
What is the conclusion the Heckscher-Ohlin model comes to? why is this?
“WITH TWO GOODS AND TWO FACTORS, EACH COUNTRY WILL EXPORT THE GOOD THAT USES INTENSIVELY THE FACTOR OF PRODUCTION IT HAS IN ABUNDANCE AND WILL IMPORT THE OTHER GOOD.”
What is Leotief’s paradox? What explains it?
Contrary to the predictions of the Heckscher-Ohlin model, the US (a capital abundant country) was found to export labor-intensive goods and import capital-intensive goods
Explanations:
1. US and foreign technologies aren’t the same across all nations
2. by focussing only on labour and capital, leontief ignored land abundance in the US
3. Difference in quality of labour in abundance => unskilled vs skilled abundance
4. WW2 throwing off data
5. US not completely engaged in free trade
How can we account for productivity?
Effective Factor Endowment = Actual factor endowment * factor productivity
What does the HO model predict in terms of welfare of factor provision
THE H-O MODEL PREDICTS REAL GAINS FOR THE FACTOR USED INTENSIVELY IN THE EXPORT GOOD, WHOSE RELATIVE PRICE GOES UP WITH THE OPENING OF TRADE, AND REAL LOSSES FOR THE OTHER FACTOR
“In the HO model, the abundant factor gains from trade, and the scarce factor loses from trade.”
As a result of trade, the price of exported good increase -> demand for the factor used intensively increases -> real income of the factor increases
What is the Stopler and Samuelson Theorem?
Trade protection or liberalisation impacts the distribution of income between labour and capital BECAUSE an industry facing import competition might see reduced returns to the factor not-intensively used. Therefore, the gap between real incomes will widen
BASICALLY while the economy as a whole might benefit from trade, specific groups might now and so Govts should be careful about their trade policy
