PubPol/Econ 541. Behind the Standard Model. Essential Features of Ricardian and Heckscher-Ohlin Models

Transcription

1 PubPol/Econ 541 Behind the Standard Model Essential Features of Ricardian and Heckscher-Ohlin Models by Alan V. Deardorff University of Michigan 2018

2 Outline Ricardian Model Heckscher-Ohlin Model 2

3 Purposes To see what determines Comparative Advantage and thus trade To see how trade affects economies 3

4 The Ricardian Model Assumes Two goods: cloth C and food F Outputs: Q F, Q C Prices: P F, P C One factor: labor L Two countries: Home and Foreign (*) Takes as given Unit labor requirements 4

5 Ricardian Technology Unit labor requirements a i, a i * = amount of labor needed to produce one unit of output of good i = C,F Assume (so that Home will end up exporting C, as we ll see below): a C a C * a < F a F * 5

6 Ricardian PPF Q F Full employment requires L = a C Q C + a F Q F and thus L/a F Q F = L/a F (a C /a F )Q C a C /a F L/a C Q C 6

7 2-Countries PPFs Q F Q F * Assumes L*/a F * a C a F a C < * a F * L/a F a C /a F L/a C L*/a C * Q C * Q C a C */a F * 7

8 NOT equilibrium: RP < a C /a F Q F RP < a C /a F Q F * L*/a F * Both would produce only F L/a F a C /a F L/a C L*/a C * Q C * Q C a C */a F * 8

9 NOT equilibrium: RP > a C */a F * Q F RP > a C */a F * Q F * L*/a F * Both would produce only C L/a F a C /a F L/a C L*/a C * Q C * Q C a C */a F * 9

10 Specialized Equilibrium: a C /a F < RP < a C */a F * Q F RP a C /a F < RP < a C */a F * Q F * L*/a F * S* Both specialize: Home in C, Foreign in F Trade L/a F D D* RP a C /a F S a C */a F * L/a C L*/a C * Q C * Q C 10

11 Specialized Equilibrium: a C /a F < RP < a C */a F * Q F a C /a F < RP < a C */a F * Q F * L*/a F * S* Gains from Trade RP L/a F D D* S A *=D A * S A =D A RP a C /a a F S C */a F * L/a C L*/a C * Q C * Q C 11

12 Home Diversified Equilibrium: a C /a F = RP < a C */a F * Q F a C /a F = RP < a C */a F * Q F * L*/a F * S* Only Foreign specializes: Trade D* L/a F RP S A =D A =D S A * =D A * RP S a C /a F a C */a F * L/a C L*/a C * Q C * Q C 12

13 Home Diversified Equilibrium: a C /a F = RP < a C */a F * Q F a C /a F = RP < a C */a F * Q F * L*/a F * S* Only Foreign Gains D* L/a F RP S A =D A =D S A * =D A * RP a C /a F S a C */a F * L/a C L*/a C * Q C * Q C 13

14 The Heckscher-Ohlin (H-O) Model Assumes Two goods: cloth C and food F Outputs: Q F, Q C Prices: P F, P C Two factors: labor L, land T Endowments: L, T, L*, T* Two countries: Home and Foreign (*) Takes as given Constant-returns-to-scale production functions Same in both countries 14

15 H-O Technology Unit factor requirements a ij = a ij * = amount of factor i = L, T needed to produce one unit of output of good j = C,F (Usually these are taken to be variable, depending on factor prices.) Assume (so that Home will end up exporting C, as we ll see below): a LC a TC > a LF a TF That is, production of cloth is labor-intensive compared to production of food 15

16 H-O Endowments Factor endowments H-O takes as given the countries endowments of the two factors Assume (again so that Home will end up exporting C, as we ll see below): L T > L* T* That is, Home is relatively well-endowed with labor (relative to land compared to Foreign) 16

17 H-O PPFs With these assumptions, it can be shown that PPFs are curved, as in the Standard Model. Home, because it is relatively well endowed with labor, is better able to produce the labor-intensive good C. PPFs therefore look as we saw them in the Standard Model. 17

18 H-O Trade Equilibrium Q F Q F * Trade D S* S A *=D A * D* S A =D A S Q C Q C * 18

19 H-O Gains from Trade Q F Q F * Gains from Trade D S* S A *=D A * D* S A =D A S Q C Q C * 19

20 H-O Production Changes Q F Due to Trade Q F * Home shifts towards C RP W S* Foreign shifts towards F RP A D S A *=D A * D* S A =D A S RP A * RP W Q C Q C * 20

21 H-O Price Changes Due to Trade Q F RP W Q F * S* RP rises in Home and falls in Foreign RP A D S A *=D A * D* S A =D A S RP A * RP W Q C Q C * 21

22 H-O Effects on Factor Prices Can t be seen in these pictures, but Factor Price Equalization (FPE) Equality of goods prices (due to free trade) causes equality of factor prices (wage of labor and rent of land) Stolper-Samuelson Theorem (SS) As price rises for good using intensively the abundant factor, Real wage of that factor rises Real wage of other (scarce) factor falls 22

23 Factor Price Equalization Simple analytics P C = wa LC + ra TC P F = wa LF + ra TF => w = (a TF P C a TC P F )/Δ r = (a LF P C a LC P F )/Δ Δ = a LC a TF a LF a TC Thus (FPE): If P C =P C * & P F =P F * Then w=w* & r=r* 23

24 Stolper-Samuelson Theorem It can also be shown that So that If %ΔP C > %ΔP F, so that ΔP C /P F > 0 Then %Δw > %ΔP C > %ΔP F > %Δr w rises relative to both prices, and r falls relative to both prices Recall a LC a TC < a LF a TF That is (SS): if ΔP C /P F > 0, then real wage rises, and real rent falls 24

25 SS Interpretations 1. A rise in relative price of a good increases the real return to the factor used intensively in its production and lowers the real return to the other factor. 2. Free trade benefits the abundant factor and hurts the scarce factor 3. Protection benefits the scarce factor and hurts the abundant factor 25