Stolper-Samuelson Theorem
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1 ecture 4c: tolper-amuelson Theorem Thibault FAY C8 International Trade pring 208
2 IN THE PECIFIC-FACTOR MODE Assume that the computer industry only use capital and that the shoe industry only use labor. If the price of computers increases with trade: a) Workers and capital owners all gains from trade but capital owners gain more b) Workers and capital owners all gains from trade but workers gain more c) Capital owners gain from trade and workers lose d) Workers gain from trade and capital owners lose
3 IN THE PECIFIC-FACTOR MODE We have shown (see chapter 3): c) Capital owners gain from trade and workers lose Now, today the key question is: Does the same result hold when both industries use and and factors are mobile? (=HO model)
4 (Continuation of chapter 4) tolper-amuelson Theorem Within the Heckscher-Ohlin framework:
5 (Continuation of chapter 4) tolper-amuelson Theorem Within the Heckscher-Ohlin framework: - What is the effect of trade on wages? (adjusting for prices, i.e. looking at welfare) - What is the effect of trade on the rental rate?
6 (Continuation of chapter 4) tolper-amuelson Theorem Within the Heckscher-Ohlin framework: - What is the effect of trade on wages? (adjusting for prices, i.e. looking at welfare) - What is the effect of trade on the rental rate? - What is the effect of trade on the wage/rental rate ratio? Focus first on wage/rental rate ratio Focus first on relative demand & supply of labor/capital
7 Relative demand for Capital and abor: What is the relative supply of labor at Home?
8 Relative demand for Capital and abor: What is the relative supply of labor at Home? What is the relative demand for labor at Home?
9 Relative demand for Capital and abor: What is the relative supply of labor at Home? What is the relative demand for labor at Home? Relative supply Relative demand
10 Relative demand for Capital and abor: Relative supply Relative demand Relative demand for labor determined by: abor intensity in each industry: C / C and / Industry shares in capital use: C / and / Relative demand for labor = Average of labor intensities, weighted by the share of each industry in capital use.
11 Relative demand for Capital and abor: Relative supply Relative demand C / C and / : abor intensity in each industry (correspond to each light-blue curve) C / tot : hare of Computer industry total use = weight put on Computer industry / tot : hare of Computer industry total use = - ( C / tot ) Relative demand for labor = Average of labor intensities, weighted by the share of each industry in capital use.
12 Relative demand for Capital and abor: Relative demand for labor = Average of labor intensities, weighted by the share of each industry in capital use.
13 Relative supply of Capital and abor: Relative supply of labor = Fixed (vertical line)
14 Effect of trade (Effect of an increase in the Relative Price of Computers) Expansion of the computer industry (at Home)
15 Relative demand for Capital and abor: Relative supply Relative demand A shift towards the computer industry leads to: An increase in computer industry capital share C / An decrease in shoe industry capital share / Decrease in relative demand for labor
16 Effect of Trade (Effect of an increase in the Relative Price of Computers)
17 Effect of Trade (Effect of an increase in the Relative Price of Computers)
18 Effect of trade At Home, opening to trade induces: An increase in the relative price of computers An expansion of the computer industry A decrease of the demand for labor A decrease in the wage/rental-rate ratio
19 Examples: hoe: Computer: Effect of trade on rental rate / w ratio? / 3 2 / 3 2 r w a Y 2 / 3 / 3 2 r w a Y C C C C C C 3- Effect of trade on factor prices Taking the production function from last lecture, with / 3 / 3 2
20 Examples: hoe: computer: Effect of trade on rental rate / w ratio: 2 r w 2 r w C C C C C.. Equilibrium:
21 Examples: hoe: computer: Effect of trade on rental rate / w ratio: 2 r w 2 r w C C C C C.. Equilibrium: implies: r w r w C. 2. 2
22 Examples: hoe: computer: Effect of trade on rental rate / w ratio: 2 r w 2 r w C C C C C.. Equilibrium: implies: And thus: r w r w C r w C 2 2.
23 Examples: hoe: computer: Effect of trade on rental rate / w ratio: 2 r w 2 r w C C C C C.. Equilibrium: implies: And thus: decreases as C increases and decreases r w r w C r w C 2 2. r w
24 Clicker question Assume that computers are more capital intensive than shoes. If the price of shoes increases with trade: a) Capital owners gain relatively more than workers b) Workers gain relatively more than capital owners
25 Clicker question Assume that computers are more capital intensive than shoes. If the price of shoes increases with trade: b) Workers gain relatively more than capital owners Because in that case: W/R increases!
26 What s next? We have yet to examine whether workers actually gain or lose from trade. As for the pecific-factor Model, we examine how MP and MP evolve. As for the pecific-factor Model, this depends crucially on how C / C and / change in each industry.
27 Clicker question Assume that computers are more capital intensive than shoes. If the price of computers increases with trade: a) abor intensity increases in the hoe industry and decreases in the Computer industry b) abor intensity decreases in the hoe industry and increases in the Computer industry c) abor intensity increases in both industries d) abor intensity decreases in both industries
28 Answer:
29 Answer: Assume that computers are more capital intensive than shoes. If the price of computers increases with trade: c) abor intensity increases in both industries ince the relative price of capital R/W increases, firms in A industries try to hire more workers relative to capital.
30 Answer: Assume that computers are more capital intensive than shoes. If the price of computers increases with trade: c) abor intensity increases in both industries ince the relative price of capital R/W increases, firms in A industries try to hire more workers relative to capital. On the graph: Moving to the right for the demand curve in each industry (light-blue curves). Notice that the curves specific to each industry do not move, it s just a movement along these curves.
31
32 Effect of trade At Home, opening to trade induces: An increase in the relative price of computers An expansion of the computer industry A decrease of the demand for labor A decrease in the wage/rental-rate ratio increase in labor intensity C / C and / in each industry
33 Effect of trade Relative supply: No change Relative demand No change in total hift of towards computers implies a increase in labor intensity in each industry On aggregate, the relative demand remains unchanged
34 Effect of trade on MP and MP?
35 Effect of trade on MP and MP? MP C because C / C increases (there are more workers to operate machines in the computer industry) MP because / increases (there are also more workers to operate machines in the shoe industry) Conversely, MP decreases in both industries
36 We answered: - What is the effect of trade on the wage/rental rate ratio? Now: - What is the effect of trade on the rental rate? (in real terms, i.e. in terms of welfare) - What is the effect of trade on wages? (in real terms, i.e. in terms of welfare)
37 Effect on rental rate? What about the rental rate? Welfare of owners? R P C MP C and R P MP
38 Effect on rental rate? What about the rental rate? Welfare of owners? R P C MP C and R P MP Real rate (compared to each price): R/P C = MP C because C / C increases (there are more workers to operate machines in the computer industry)
39 Effect on rental rate? What about the rental rate? Welfare of owners? R P C MP C and R P MP Real rate (compared to each price): R/P C = MP C because C / C increases R/P = MP because / increases (there are also more workers to operate machines in the shoe industry)
40 Effect on rental rate? What about the rental rate? Welfare of owners? R P C MP C and R P MP Real rate (compared to each price): R/P C = MP C because C / C increases R/P = MP because / increases The rental rate increases faster than any price in the Home country
41 Effect on wages? What about wages? Welfare of workers? W = P C MP C and W = P MP Real wage (compared to each price): W/P C = MP C because C / C increases W/P = MP because / increases Wages decreases faster than any price in the Home country
42 Determination of the Real Wage and Real Rental tolper-amuelson Theorem: If the Home country opens to trade, the price of computers increases (compared to the price of shoes) and: W W P P P P M M R R
43 Determination of the Real Wage and Real Rental tolper-amuelson 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. P: regardless of which industry employs this factor (HO model is about the long-run: factors are mobile)
44 Answer to initial clicker question for HO: Assume that computers are more capital intensive than shoes. If the price of computers increases with trade: c) Capital owners gain from trade and workers lose
45 Heckscher-Ohlin: ummary from Chapter 4 We can generate trade by differences in endowments, even if technologies are the same Heckscher-Ohlin Theorem: if a country is abundant in a factor, it should exports in industries that are relatively intensive in this factor. The data support HO theorem only when also incorporate differences in productivity. tolper-amuelson theorem: An increase in the price of a good generates an increase in the real earning of the factor used intensively in the production of that good, and should decrease the real earning of the other factor
46 4- Trade and wage inequality - Next parts: A few words on wage inequality FDI and migration (chapter 5)
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