Lesson 11: Specific-Factors Model (continued)

Transcription

1 International trade in the global economy 60 hours II Semester Luca Salvatici Lesson 11: Specific-Factors Model (continued) 1

2 3 Earnings of Capital and Land Determining the Payments to Capital and Land Effects on capital and land rental: With labor leaving agriculture, the marginal product of each acre falls, so R T /P A also falls. The fact that R T /P A falls means that the real rental on land in terms of food has gone down, so landowners cannot afford to buy as much food. Thus, landowners are clearly worse off from the rise in the price of the manufactured good because they can afford to buy less of both goods.

3 3 Earnings of Capital and Land Determining the Payments to Capital and Land Summary An increase in the relative price of an industry s output will increase the real rental earned by the factor specific to that industry but will decrease the real rental of factors specific to other industries. This conclusion means that: the specific factors used in export industries will generally gain as trade is opened because the relative price of exports rises. the specific factors used in import industries will generally lose as trade is opened and the relative price of imports falls.

4 3 Earnings of Capital and Land Determining the Payments to Capital and Land General Equation for the Change in Factor Prices These equations summarize the response of all three factor prices in the short run, when capital and land are specific to each sector but labor is mobile. The specific factor in the sector whose relative price has increased gains. The specific factor in the other sector loses. Labor is caught in the middle, with its real wage increasing in terms of one good but falling in terms of the other.

5 K e y T e r m KEY POINTS 1. Opening a country to international trade leads to overall gains, but in a model with several factors of production, some factors of production will lose. 2. In the specific-factors model, factors of production that cannot move between industries will gain or lose the most from opening a country to trade. The factor of production that is specific to the import industry will lose in real terms, as the relative price of the import good falls. The factor of production that is specific to the export industry will gain in real terms, as the relative price of the export good rises.

6 K e y T e r m KEY POINTS 3. In the specific-factors model, labor can move between the industries and earns the same wage in each. When the relative price of either good changes, then the real wage rises when measured in terms of one good but falls when measured in terms of the other good. Without knowing how much of each good workers prefer to consume, we cannot say whether workers are better off or worse off because of trade.

7 K e y T e r m KEY POINTS 4. Economists do not normally count the costs of unemployment as a loss from trade because people are often able to find new jobs. In the United States, for example, about two-thirds of people laid off from manufacturing or services find new jobs within two or three years, though sometimes at lower wages. 5. Trade Adjustment Assistance policies are intended to compensate those who are harmed due to trade by providing additional income during the period of unemployment.

8 The world behind a simple shirt 8

9 Introduction I In this chapter, we outline the Heckscher-Ohlin model, a model that assumes that trade occurs because countries have different resources. Our first goal is to describe the Heckscher-Ohlin (HO) model of trade. The specific-factors model that we studied in the previous chapter was a short-run model because capital and land could not move between the industries. In contrast, the HO model is a long-run model because all factors of production can move between the industries.

10 Introduction I Our second goal is to examine the empirical evidence on the Heckscher-Ohlin model. By allowing for more than two factors of production (and also allowing countries to differ in their technologies, as in the Ricardian model) the predictions from the Heckscher-Ohlin model match more closely the trade patterns in the world economy today. The third goal of the chapter is to investigate how the opening of trade between the two countries affects the payments to labor and to capital in each of them.

11 1 Heckscher-Ohlin Model Assumptions of the Heckscher-Ohlin Model Assumption 1: Two factors of production, labor and capital, can move freely between the industries. Assumption 2: Shoe 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.

12 2 Heckscher-Ohlin Model Labor Intensity of Each Industry The demand for labor relative to capital is assumed to be higher in shoes than in computers, L S /K S > L C /K C. These two curves slope down just like regular demand curves, but in this case, they are relative demand curves for labor (i.e., demand for labor divided by demand for capital). FIGURE 4-1

13 3 Heckscher-Ohlin Model Assumptions of the 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 capitalabundant, so that K/L >K*/L*. 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. 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.

14 4 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.

15 5 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.

16 6 Heckscher-Ohlin Model No-Trade Equilibrium Production Possibilities Frontiers, Indifference Curves, and No-Trade Equilibrium Price FIGURE 4-2 (3 of 3) 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 ispoint A*, with a higher relative price skewed toward shoes. of computers, as indicated by the steeper slope of (P* C /P* S ) A *.