Specific factor endowments and trade I

Transcription

1 Specific factor endowments and trade I Part B: Small open economy Part C: Two open economies (intro) Robert Stehrer The Vienna Institute for International Economic Studies - wiiw April 14, 2015

2 1 Small country assumption 2 Two large trading economies

3 Assumptions and conjectures 1 World prices are given for small country 2 Assume, for example, that p w 1 p w 2 > p 1 3 According to the principle of comparative advantage one would expect 1 Country specialises in good 1 2 Country exports good 1 and imports good 2 3 Labour shifts from industry 2 to industry 1 4 As relative price of good 1 is increasing (of good 2 is decreasing) one would expect that 1 Consumers consume relatively less of good 1 and more of good 2 5 Questions: 1 Overall welfare gains? 2 Are all groups (capital owners in both sectors, labour) gaining?

4 Equilibrium Equilibrium relative price determined by technology, endowment and demand conditions x 2 MRT = MRS = p 1 p 1 x 1

5 Equilibrium at given prices p i p 1 MPL 1 MPL 2 w 0 l 1 l

6 1 Determines w and l i with l 1 + l 2 = l 2 With FE assumption (of fixed factors) also MPK i is determined 3 Determines factor income of fixed factors 4 Total income: MPK i = r i p i p i MPK i = r i y = wl + r 1 k 1 + r 2 k 2 = p 1 x 1 + x 2

7 Equilibrium at world market prices Assume: p w 1 p w 2 > p1 1 Country has comparative advantage in goods 1 production 2 Production shifts towards good 1 3 Consumption shifts towards good 2 4 Exports good 1 and imports good 2 x 2 MRT = MRS = p 1 p 1 p 1 x 1

8 Labour market implications p 1 MPL 1 MPL 2 w w 0 l

9 1 Labour shifts to industry 1 1 Additional output can be produced (specialisation) 2 Nominal wage increases 1 Demand for labour shifts to activities with lower marginal productivity 2 Increase of nominal wage is lower than increase in price 1 3 Workers gain in terms of good 2, but loose in terms of good 1 (total effect dependent on demand structure) 4 Less workers employed in sector 2 1 MPK 2 = r 2 decreases (comparative disadvantage sector) 2 MPL 2 = w increases 5 More workers employed in sector 1 1 MPK 1 = r 1 p 1 increases (comparative advantage sector) 2 MPL 1 = w p 1 decreases

10 Exogenous p 1 is increasing Mobile factor: p 1 > w w p 1 l 1 > 0 MPL 1 = w p 1 = 0 < w w l 2 < 0 MPL 2 = w Fixed factors: l 1 > 0 MPK 1 = r 1 p 1 r 1 > p 1 l 2 < 0 MPK 2 = r 2 r 2 < = 0

11 Exogenous change in price 1 Mobile factor 1 Mobile factor is loosing in terms of good of which price is increasing (comparative advantage sector) 2 Mobile factor is gaining in terms of other good (comparative disadvantage sector) 3 Overall effect depends on demand structure 2 Fixed factors 1 Fixed factor of industry for which price is increasing unambiguously gains (in terms of both goods) 2 Fixed factor in other industry unambiguously looses (in terms of both goods)

12 Autarkic equilibrium in specific factors model 1 Endowments: Mobile factor l i = 200; Fixed factors k i = Demand system: Cobb-Douglas demand with α i = Production function: Cobb-Douglas with γ i = 0.5 and ϕ i = 1 4 Numeraire: = 1 Sector 1 Sector 2 Economy Prices p i 1 1 Factor prices / income w i r i Factor demand l i k i Production x i Consumption f i Total income (nominal) GDP 200 Price index P 1 Total income (real) GDP/P 200 Factor income (real) w i r i Utility level U 100

13 Small open economy trade equilibrium in specific factors model 1 Endowments: Mobile factor l i = 200; Fixed factors k i = Demand system: Cobb-Douglas demand with α i = Production function: Cobb-Douglas with γ i = 0.5 and ϕ i = 1 4 Numeraire: = 1; p 1 = 1.1 (from p 1 = 1) Sector 1 Sector 2 Economy Prices p i Factor prices / income w i r i Factor demand l i k i Production x i Consumption f i Total income (nominal) GDP Price index P 1.05 Total income (real) GDP/P Factor income (real) w i r i Utility level U

14 1 Countries have same technologies Opening up 2 Country 1 has relatively more capital in sector 1 as compared to country 2 k1 1 k2 1 > k2 1 k Implies for relative prices in autarky p 1 1 p 1 2 < p Free trade price settles in between autarky prices p 1 1 p 1 2 < pw 1 p w 2 < p2 1 2 i.e. p 1 1 goes up

15 Opening up Trading economies 1 Country 1 1 Country 1 has comparative advantage in sector 1 (is better endowed with fixed capital in 1) 2 Country 1 specialises in this product, exports it and imports good 2 3 (Relative) Price of this product increases for country 1 4 Real income effects as before 2 Country 2 1 Analogous but opposite effects 3 Both countries gain from trade 4 Existence, etc. of free trade equilibrium not proofed