INTERNATIONAL TRADE: THEORY AND POLICY (HO)

Transcription

1 INTERNATIONAL ECONOMIC POLICY AND DEVELOPMENT AA INTERNATIONAL TRADE: THEORY AND POLICY (HO) PROF. PIERLUIGI MONTALBANO

2 Repetita iuvant KEY POINTS of the Ricardian Model 1. the pattern of trade is determined by comparative advantage. A country has comparative advantage in producing a good when the country s opportunity cost of producing the good is lower than the opportunity cost of producing the good in another country. Even countries with poor technologies can export the goods in which they have comparative advantage 2. There are gains from trade for both countries. By exporting the good in which a country has the lowest opportunity cost, the country could benefit from participating in international trade (i.e. more consumption) Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

3 Revealed comparative advantage RCA index (Balassa, 1965). It is a ratio of product k s share in country i s exports (X) to its share in world trade. Formally A value of the RCA above 1 in sector k for country i means that i has a revealed comparative advantage in that sector (relative to the ROW) Advantage: ability to derive a workable measure of each country s comparative advantages as they are revealed in trade data, avoiding difficulties linked to quantitative evaluations of factor-endowments and relative prices. Main drawback: just exports; asymmetric behavior between comparative advantages and disadvantages. It ranges from 1 to infinity for products in which a country reveals comparative advantage, but only from zero to 1 for comparative disadvantage products.

4 The Heckscher-Ohlin Model

5 Why countries trade An overview of trade theories:

6 The Heckscher-Ohlin Model The Heckscher-Ohlin model assumes that trade occurs because countries have different resources. The HO model is a long-run model because all factors of production can move across industries. The model investigates also the gains from trade (i.e., the earnings of labor and capital in partner countries)

7 Heckscher-Ohlin Model The model was developed in 1919 by two Swedish economists, Eli Heckscher and Bertil Ohlin To explain the golden age of international trade between 1890 and 1914, during which there was an increase in the ratio of trade to gross domestic product (GDP) By assuming the same technologies across countries they are able to explain trade by uneven distribution of resources Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

8 Examples of international trade driven by different resources Canada has a large amount of land and therefore exports agricultural and forestry products as well as petroleum US, Western Europe and Japan have many highly skilled workers and much capital and export sophisticated services and manufactured goods China and other Asian countries have a large number of workers and moderate but growing amounts of capital and export less sophisticated manufactured goods Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

9 Basic assumptions: Heckscher-Ohlin Model 2 countries: Home and Foreign 2 goods: computers and shoes 2 factors of production: labor and capital The total amount of capital (K) in an economy is given by the sum of the capital used in shoes KS and computers KC. The total available labor (L) in the economy is equal to the labor used in shoes LS and computers LC. The SIX assumptions of the Heckscher-Ohlin model are the following: Assumption 1: the two factors of production, labor and capital, can move freely between the industries. Assumption 2: Shoes production is labor-intensive; that is, it requires more labor per unit of capital to produce shoes than computers, so that L S /K S > L C /K C. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

10 Heckscher-Ohlin Model Assumption 3: Foreign is labor-abundant, by which we mean that the labor capital ratio in Foreign exceeds that in Home, L*/K*> L/K. Equivalently, Home is capital-abundant, so that K/L >K*/L* (i.e. resources differ across countries). Why? Geographic size, populations, immigration/emigration, different stage of development, etc.) Assumption 4: The final outputs, shoes and computers, can be traded freely (i.e., without any restrictions) between nations, but labor and capital do not move between countries. Assumption 5: The technologies used to produce the two goods are identical across the countries (the opposite of that in the Ricardian model). Assumption 6: Consumer tastes are the same across countries, and preferences for computers and shoes do not vary with a country s level of income. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

11 FPPs Y A A 80 A 20 B 20 B 20 B X 1 PF Constant OC 2 PFs Increasing OC 2 PFs Decreasing OC Pierluigi Montalbano Università di Roma La Sapienza

12 Derivazione della Curva FPP in presenza di Fattori Specifici Pierluigi Montalbano Università di Roma La Sapienza

13 Heckscher-Ohlin Model No-Trade Equilibrium Production Possibilities Frontiers, Indifference Curves, and No-Trade Equilibrium Price FIGURE 4-2 (1 of 3) No-Trade Equilibria in Home and Foreign The Home production possibilities frontier (PPF) is shown in panel (a), and the Foreign PPF is shown in panel (b). Because Home is capital abundant and computers are capital intensive, the Home PPF is skewed toward computers. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

14 Its slope equals MPLA/MPLM, the ratio of the marginal products of labor in the two industries. The slope of the PPF can be interpreted as the opportunity cost of the manufacturing output it is the amount of the agricultural good that would need to be given up to obtain one more unit of output in the manufacturing sector. FIGURE 3-2 The Home Country Production Possibilities Frontier Production Possibilities Frontier The production possibilities frontier shows the amount of agricultural and manufacturing outputs that can be produced in the economy with labor Worth Publishers International Economics, 3e Feenstra/Taylor 14

15 The Home Country Opportunity Cost and Prices FIGURE 3-3 Increase in the Relative Price of Manufactures In the absence of international trade, the economy produces and consumes at point A. The relative price of manufactures, P M /P A, is the slope of the line tangent to the PPF and indifference curve U 1, at point A. With international trade, the economy is able to produce at point B and consume at point C. The world relative price of manufactures, (P M /P A ) W, is the slope of the line BC. The rise in utility from U 1 to U 2 is a measure of the gains from trade for the economy Worth Publishers International Economics, 3e Feenstra/Taylor 15

16 Heckscher-Ohlin Model No-Trade Equilibrium Production Possibilities Frontiers, Indifference Curves, and No-Trade Equilibrium Price FIGURE 4-2 (2 of 3) No-Trade Equilibria in Home and Foreign (continued) Home preferences are summarized by the indifference curve, U. The Home no-trade (or autarky) equilibrium is at point A. The flat slope indicates a low relative price of computers, (P C /P S ) A. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

17 No-Trade Equilibrium Production Possibilities Frontiers, Indifference Curves, and No-Trade Equilibrium Price FIGURE 4-2 (3 of 3) Heckscher-Ohlin Model A higher relative price of computers No-Trade Equilibria in Home and Foreign Foreign preferences are summarized (continued) by the indifference curve, U* Foreign is labor-abundant and shoes are The Foreign no-trade equilibrium is at labor- intensive, so the Foreign PPF is point A*, with a higher relative price skewed toward shoes. of computers, as indicated by the steeper slope of (P* C /P* S ) A *. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

18 Heckscher-Ohlin Model Free-Trade Equilibrium Home Equilibrium with Free Trade FIGURE 4-3 (1 of 2) International Free-Trade Equilibrium at Home At the free-trade world relative price of computers, (P C /P S ) W, Home produces at point B in panel (a) and consumes at point C, exporting computers and importing shoes. Point A is the no-trade equilibrium. The trade triangle has a base equal to the Home exports of computers (the difference between the amount produced and the amount consumed with trade, (Q C2 Q C3 ). Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

19 FIGURE 4-3 (2 of 2) Heckscher-Ohlin Model Free-Trade Equilibrium Home Equilibrium with Free Trade International Free-Trade Equilibrium at Home (continued) The height of this triangle is the Home imports of shoes (the difference between the amount consumed of shoes and the amount produced with trade, Q S3 Q S2 ).. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

20 Heckscher-Ohlin Model Free-Trade Equilibrium Foreign Equilibrium with Free Trade FIGURE 4-4 (1 of 2) International Free-Trade Equilibrium in Foreign At the free-trade world relative price of computers, (P C /P S ) W, Foreign produces at point B* in panel (a) and consumes at point C*, importing computers and exporting shoes. Point A* is the no-trade equilibrium.) The trade triangle has a base equal to Foreign imports of computers (the difference between the consumption of computers and the amount produced with trade, (Q* C3 Q* C2 ). Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

21 FIGURE 4-4 (2 of 2) Heckscher-Ohlin Model Free-Trade Equilibrium Foreign Equilibrium with Free Trade International Free-Trade Equilibrium in Foreign (continued) The height of this triangle is Foreign exports of shoes (the difference between the production of shoes and the amount consumed with trade, Q* S2 Q* S3 ).. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

22 Pattern of Trade Heckscher-Ohlin Model Free-Trade Equilibrium Home exports computers, the good that uses intensively the factor of production (capital) found in abundance at Home. Foreign exports shoes, the good that uses intensively the factor of production (labor) found in abundance there. This important result is called the Heckscher-Ohlin theorem. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

23 Testing the Heckscher-Ohlin Model You might think that the H-O theorem is somewhat obvious. However, this prediction does not always work in practice The first test of the Heckscher-Ohlin theorem was performed by economist Wassily Leontief in 1953 using data for the US from A surprising conclusion! From the HO theorem, Leontief expected that the United States would export capital-intensive goods and import labor-intensive goods. What Leontief actually found, however, was just the opposite: the capital labor ratio for U.S. imports was higher than the capital labor ratio found for U.S. exports! This finding contradicted the Heckscher-Ohlin theorem and came to be called Leontief s paradox.

24 Testing the Heckscher-Ohlin Model Leontief s Paradox TABLE 4-1 Leontief s Test Leontief used the numbers in this table to test the Heckscher-Ohlin theorem. Each column shows the amount of capital or labor used in all industries needed to produce $1 million worth of exports from, or imports into, the United States in As shown in the last row, the capital labor ratio for exports was less than the capital labor ratio for imports, which is a paradoxical finding Worth Publishers International Economics, 3e Feenstra/Taylor 24

25 Testing the Heckscher-Ohlin Model Explanations Leontief s Paradox U.S. and foreign technologies are not the same, in contrast to what the HO theorem and Leontief assumed. By focusing only on labor and capital, Leontief ignored land abundance in the United States (US exports might have been agricultural products, which use land intensively) Leontief should have distinguished between skilled and unskilled labor (because it would not be surprising to find that U.S. exports are intensive in skilled labor). The data for 1947 may be unusual because World War II had ended just two years earlier. The United States was not engaged in completely free trade, as the Heckscher-Ohlin theorem assumes.

26 Differing Productivities across Countries Remember that in the original formulation of the paradox, Leontief had found that the United States was exporting laborintensive products even though it was capital-abundant at that time. One explanation for this outcome would be that labor is highly productive in the United States and less productive in the rest of the world. Hence: Testing the Heckscher-Ohlin Model Differences in factors productivity (technologies were not the same across countries) The pattern of 1947 simply reflects the high producivity of labor in the US and its abundance The US was abundant in both capital and (skilled) labor

27 Testing the Heckscher-Ohlin Model To obtain better predictions from the H-O model, we have to extend it in several directions: 1. first by allowing for more than two factors of production 2. and second by allowing countries to differ in their technologies Both extensions make the predictions match more closely the trade patterns we see in the world economy today

28 Effects of Trade on Factor Prices How do the changes in the relative prices of goods due to trade affect the factors earnings? The Stolper-Samuelson Theorem provides an answer to the above question.

29 Effects of Trade on Factor Prices Stolper-Samuelson Theorem: In the long run, when all factors are mobile, an increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of that good and decrease the real earnings of the other factor. For our example, the Stolper-Samuelson theorem predicts that when Home opens to trade and faces a higher relative price of computers, the real rental on capital in Home rises and the real wage in Home falls. In Foreign, the changes in real factor prices are just the reverse. Book: Feenstra/Taylor, 2011, International Trade,Worth Publishers

30 K e y T e r m KEY POINTS of the Heckscher-Ohlin model 1. In the Heckscher-Ohlin model countries trade because the available resources (labor, capital, and land) differ across countries. 2. In the Heckscher-Ohlin model, we assume that the technologies are the same across countries 3. The Heckscher-Ohlin model is a long-run framework, so labor, capital, and other resources can move freely between the industries 4. Patterns of trade: With two goods, two factors, and two countries, the Heckscher-Ohlin model predicts that a country will export the good that uses its abundant factor intensively and import the other good.

31 K e y T e r m KEY POINTS of the Heckscher-Ohlin model 5. According to the Stolper-Samuelson theorem, in the long run, an increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of that good and decrease the real earnings of the other factor. 6. Putting together the Heckscher-Ohlin theorem and the Stolper- Samuelson theorem, we conclude that a country s abundant factor gains from the opening of trade (because the relative price of exports goes up), and its scarce factor loses from the opening of trade.