C) a decrease in the wage and an increase in the return to capital in the receiving country.

Transcription

1 Lecture06Spring09 Page 1 Review Questions When factors of production are not fixed (as per the long run) and labor immigrates, capital will: A) remain fixed because capital is never mobile. B) increase in the capital intensive industry. *C) move to the higher productivity use in the labor intensive industry until returns are again equalized. D) become idled as owners of capital seek more profitable opportunities. In the long run (the HO model), immigration will lead to: A) an increase in the wage and a decrease in the return to capital in the receiving country. B) an increase in both the wage and the return to capital in the receiving country. C) a decrease in the wage and an increase in the return to capital in the receiving country. *D) no change in the wage and the return to capital in the receiving country. For the sending country, what will be the long run effects of immigration on wages and the return to capital? A) The wage will increase, and the return to capital will decrease. B) The wage will decrease, and the return to capital will increase. C) Both the wage and the return to capital will increase. *D) There will be no change in the wage and the return to capital. During the past 10 to 20 years, a considerable amount of foreign capital has flowed into China. What is an implication of capital flow upon the composition of Chinese trade? A) There should be no change in the composition of China's trade. B) There should be a shift toward the export of more labor intensive products. *C) There should be a shift toward the export of more capital intensive products. D) There should be a shift toward the import of more capital intensive products. Owners of capital and labor usually support the reduction of restrictions on immigration. A) True *B) False In the long run, the output of the capital intensive good will increase if the amount of capital increases in a country due to FDI. *A) True B) False

2 Lecture06Spring09 Page 2 Last time Begin with Denmark having r T = r K Physical Capital increases: Short Run Changes: Long Run Outcome: MPL curve in Physical Capital Intensive Industry (Manu): Labor Movement: Returns to Labor (wage) Physical Capital Intensive Industry (Manu) Output: Other Industry (Agri) Output: Movement of capital: Labor Movement: Physical Capital Intensive Industry (Manu) Output: Other Industry (Agri) Output: Returns to capital Returns to labor Returns to physical capital r K Returns to land capital r T

3 Lecture06Spring09 Page 3 Reminders No class next week. (March 18th) Internal Evaluations on Absalon next week! (You can change the class!)

4 Lecture06Spring09 Page 4 Chapter 6: Trade under imperfect competition Ricardian Theory (1800) technology differences drive trade under perfect competition Heckscher Ohlin (1920) endowment differences drive trade under perfect competition 1. Imperfect Competition (Monopoly, Monopolistic Competition, Duopoly) 2. Trade under Monopolistic Competition 3. NAFTA and Gravity 4. Dumping * Krugman, 1980, Section 1 * Brander & Krugman, 1983

5 Lecture06Spring09 Page 5 Some facts about Trade 1996: The EU traded 10 Trillion DKK. What percentage was to other EU countries? Tinbergen (1968): Law of Gravity might apply to Trade Trade 12 GDP * GDP B dist 1 2 n Takeaway: Big Countries trade more with other big countries.

6 Lecture06Spring09 Page 6 US Trade relative to output: Goods and Services Trade/Output (Percentage) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Exports Imports Year (Trade / GDP) X France Germany Japan UK US Developing Countries Take Away: International Trade is getting bigger since WWII

7 Lecture06Spring09 Page 7 Intra Industry Trade US Imports of Golf Clubs, 2005 Country Value Price China $278M $18 Japan $11M $109 Taiwan $6.7M $13 HK $5.3 $21 Total $305M US Exports of Golf Clubs, 2005 Country Value Price UK $84M $66 Japan $47M $98 Canada $44M $74 S.Korea $42M $88 Total $318 Index of Intra Industry Trade: min{imports,exports} 1 imports+exports 2 Index of Intra Industry Trade Year UK Germany % 56% % 57% % 72% Takeaway: There has also been an increase in intra industry trade over the last 50 yrs.

8 Lecture06Spring09 Page 8 Chapter 6: Increasing Returns to Scale HO: Perfect competition, constant returns to scale, goods are homogenous. Prediction: Country with Comparative Advantage exports that good Krugman: Imperfect Competition, increasing returns to scale, goods are differentiated. Prediction: All countries will export that varieties of the good.

9 Lecture06Spring09 Page 9 Krugman's model of Trade Assumptions: 1. Firms produce varieties of a single good. 2. Each firm has monopoly power over its own variety. 3. No firm is big enough to affect the overall market equilibrium for the good. 4. Production technology has increasing returns to scale 5. There is Free Entry in the long run 1 QD P S P P N * 2 m s C Q f mq s P: price of variety, N: number of symmetric firms, S: size of market, f fixed cost, m: marginal cost.

10 Lecture06Spring09 Page 10 Closed Economy P P M +1/2N m Q

11 Lecture06Spring09 Page 11

12 Long run Lecture06Spring09 Page 12

13 Lecture06Spring09 Page 13 Trade: Short run Under Ricardian: Under HO:

14 Long run Lecture06Spring09 Page 14

15 Lecture06Spring09 Page 15 Reminders No class next week. (March 18th) Internal Evaluations on Absalon week 12! (write me good notes) Read for Next class (March 25th): * Krugman, 1980, Section 1 * Brander & Krugman, 1983

16 Lecture06Spring09 Page 16 Review Questions Figure: Costs and Demand for a Monopolistic Competitor. The marginal cost is constant at $5.00. Assume the Demand Curve is linear. 1. If the firm maximizes revenue, what price should it charge? What is its output, revenue, and profit? 2. If the firm maximizes profit, what price should it charge? What is its output, revenue, and profit? 3. Is this firm operating in the long run or short run? For the price P, A monopolistically competitive firm faces the demand Q(P): Q P P A N where A and σ>1 are positive constants and N is the number of symmetric firms in the market. The firm has a cost C(Q) for producing Q units of output: C Q f rq where f and r are positive constants. 4. What is the firm's profit maximizing price, output, revenue, and profit? 5. How many firms are there in the market in the long run?