Technology: Neoclassical theory

Question 1

What are the assumptions in the H-O model?

How is it different to Ricados model?

Answer 1

• Identical technologies
• Two factors of production, L & K
• Two countries: Home and Foreign
• Two goods: Textiles (T) and anufactures (M)
• Factor prices: wage (w) and rent (r)
• Constant returns to scale
• Perfect competition
• Factors of production ar emobile between sectors (not countries)
• Identical and homothetic preferences

VS Ricardo:
Ricardo has different technologies, one factor of production, full specialization, everybody gains!
HO: not full specialization, winners and losers

Question 2

What will the outcome of H-E trade look like?

Answer 2

countries export products in which they are abundantin.

Question 3

What are our production functions in H-0?

Answer 3

Isoquant: Combinations of K and L that produce a given quantity of a good.
slope: MPL/MPK

Isocost: Combinations of K and L which cost the same amount. Slope: -w/r

Question 4

What does diminishing retuns to scale mean?

How does this relate to H-O when one of the assumptions is constant returns to scale?

Answer 4

When we increase one factor of production while holding all other factors constant, the marginal output will decrease.
If we increase BOTH factors of production we ave constant returns to scale.

Question 5

What is the costfunction that gives us the isocost?

Name slope and intercept

Answer 5

Cost function: budgetline given a certain budget

C=wL+rK <=> K= C/r -w/r*L where C/r is the intercept and -w/r is the slope

Question 6

What is the assumption about how producers will act?

Answer 6

• They will want to maximize profits at given factor prices w and r -> they will select the mix of factors (K/L)
• > which minimiza costs given output (maximize Q gicen costs)
• > which makes the marginal product per dollar of factor cost equal for every factor

Question 7

How does costminimization look mathiatcally?

Answer 7

MPL/w = MPK/r <=> MPL/MPK = w/r

The marginal product per dollar of factor cost is equal for every factor

Question 8

What is the k denoted for?

Answer 8

k=K/L
capital-labour ratio at certain factor prices.
a line between origo and the equilibrium

Question 9

What happens to the equilibrium of production if w falls?

Answer 9

(K y-axel, L x-axel)
Isoquant: is not effected since w anr r are not in the function.
Isocost: new line with a flatter slope (w/r). This leads to the isocost and isoquant to NOT be tangent
-> we will get a new smaller budget (lower intercept) that will be tabgent to the isoquant.

Question 10

What does the factor price equalization say?

Answer 10

If free and competitive trade, factor prices will converge along with prices of traded goods = unique relationship between factor prices and commodity prices.

Question 11

What is the FPE function of factor prices and commodity prices?

Answer 11

w/r=f(p^M/p^M) (upphöjt är bara notation inte matte

Question 12

What are the requirements for FPE to work?

Answer 12

Countries not fully specialized

Production techologies are identical and charachterized by constant returns to scale

Question 13

How does a Lerner diagrm look and what is it used for?

Answer 13

Diagram w. K and L on the axes, used to illustrate FPE in H-O model
Consisting of unit value isoquants and unit value isocosts

Question 14

What is a unit value isoquant?

Mathematically:

Answer 14

Combination of K and L that results in a value of output that equals one unit of measurement (ex 1 dollar)

p(M)M=1 <=> M=1/p(M) and p(T)T=1 <=> T=1/p(T)

Question 15

What is a unit value isocost? What does is show?

Mathematically:

Answer 15

Combinations of L and K that cost 1 unit. Shows the factor price ratio through its’ slope
1=wL + rK <=> K=1/r - w/r*L

We want the cost line to be as far down as possible

Question 16

What decides the loction of the unit value isoquant?

Answer 16

• Price of a good
• production technology (how much K and L is required to obtain a certain quantity

Kom ihåg att P(m)*M=1 <=> M=1(P(m)

Question 17

What does the location of the unit value isoquant say about the technology?

Answer 17

position further away from origin: lower price of good=more must be produced in order to earn a unit value on the market.
Less advanced production technology (meaning that more resources must be put inte production in order to get the quantity that earns one unit valut on the market)

Question 18

When we open up for trade in the FPE model, what assumptions do we have?
What will the outcome be?

Answer 18

Both countries have identical unit value isoquants due to identical technology and identical prices tjrough trade
The countries will be abundant in either capital or labour
the further away from origo the better
Outcome? the factor prices will equalize leading to the countries having identical unit value isocost, the commodity prices will be the same leading to the unit value isoquants being the same

Question 19

What is the cone of diversification?

Answer 19

For FPE to work, both countries need to produce both goods, to check this we use the cone of div.
Our “cone” is the capital-labour ratios for each good. We then check the capital labour ratio for each country. If it is outside the cone thenthey will not produce both goods.

Question 20

What are the cons with FPE?

Answer 20

in the real world, factor prices don’t converge
We dont have free trade, free trade does not converge
The diffrences in endowments between countries can lead to full specialization for example in developing countries.
diffrences in technology
Factors are not homogenous
Imperfect competition and increasing returns to scale

Question 21

What does the Stolper Samuelson theory try to explain?

Answer 21

If there are constant returns to scale and both goods are produced, a relative increase of a good will increase the real return to the factor used intensivly in that industry and reduce the real return of the other factor.

Question 22

What is the real return to workers:

Answer 22

Textile: w/P(T)=MPL(T) Manufactures: w/P(M)=MPL(M)

Basicaly how much you can by of the other good with your income.

Question 23

What are real returnes an implication of?

Answer 23

Standard of living (real income)

Question 24

What does the magnification effect say?

Answer 24

If a good price increases, the factor price of the intensive factor in that production will increase even more in price.

Question 25

What flaws are there in the SS-theorem?

Answer 25

SS says that factor prices real returns should increase in the countries that are labour-abundant (dev. countris) this does not happen since there is a biased technological progress that increased demand for high-skilled workers in general

Question 26

What does the FPE, Stolper Samuelsson, Rybczynski and H-O propositions say? (s. 97)

Answer 26

FPE: International FREE trade of final goods between two nations will lead to an equalization of the rewards of the factors of production in the two nations.

Stopler samuelsson: Arues that if the price of a good increases, the intensive factor of prod will have in incrase in factor price, incresing the real returns.

Rybczynski: If a factor of production increases, the production of which the factor is intensive will expand. The other production will also expand but only minimally.

H-O: When we open up to trade, a country will export the good which intensivly uses the relativly abundant factor of production