AEM_ECON_2300_Lecture_8__Spring_09

AEM_ECON_2300_Lecture_8__Spring_09 - Lecture 12...

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Lecture 12 1 of Professor David Lee AEM-ECON 2300 Determinants of Comparative Advantage: Factor Endowments Factor endowment theory based on… Factor intensities: relative proportions of factors required to produce a unit of output. Factor endowments : relative amounts of factors of production countries possess Heckscher-Ohlin Proposition: “A country will export that commodity whose production is relatively more intensive in its abundant factor of production, and will import that commodity which is relatively more intensive in its scarce factor of production.”
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Lecture 12 2 of Professor David Lee AEM-ECON 2300 Factor Total Intensity Prices Cost of Country/Good K/unit L/unit K L 1 unit__ A Cloth 2 5 $3 $5 $31 Steel 4 2 $3 $5 $22 B Cloth 2 5 $6 $2 $22 Steel 4 2 $6 $2 $28 Country A has a comparative advantage in steel production, e.g., more intensive in abundant factor: Capital Country B has a comparative advantage in cloth production, e.g., more intensive in abundant factor: Labor Heckscher-Ohlin Proposition: Example
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Lecture 12 3 of Professor David Lee AEM-ECON 2300 Factor Endowments of Countries & Regions (% world total) Un- Skilled skilled All Country/Region Capital Labor Labor Resources United States 20.8% 19.4% 2.6% 5.6% European Union 20.7 13.3 5.3 6.9 Japan 10.5 8.2 1.6 2.9 Canada 2.0 1.7 0.4 0.6 Rest of OECD 5.0 2.6 2.0 2.2 Mexico 2.3 1.2 1.4 1.4 Rest of L.A. 6.4 3.7 5.3 5.1 China 8.3 21.7 30.4 28.4 India 3.0 7.1 15.3 13.7 H.K.,S. Korea,Taiwan, Sing. 2.8 3.7 0.9 1.4 Rest of Asia 3.4 5.3 9.5 8.7 E. Europe (incl. Russia) 6.2 3.8 8.4 7.6 OPEC 6.2 4.4 7.1 6.7 Rest of World 2.5 4.0 10.0 8.9 Source: Institute for International Economics, 1997.
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Lecture 12 4 of Professor David Lee AEM-ECON 2300 INTERNATIONAL FACTOR ENDOWMENTS, SELECTED COUNTRIES Capital/Labor Capital/Land Labor/Land Country ($/worker) ($/hectare) (workers/ha) Australia 7,415.5 67.2 .009 Austria 4,654.4 2,192.9 .471 Canada 10,583.1 198.0 .019 France 6,868.5 3,136.9 .456 Greece 1,674.3 617.5 .369 Japan 3,358.5 5,286.5 1.574 Korea 320.4 337.3 1.053 Mexico 1,684.8 122.9 .073 Netherlands 6,371.8 1,801.7 1.852 Philippines 529.0 283.6 .536 Spain 2,936.3 760.4 .259 U.K. 4,359.6 5,169.8 1.186 United States 10,260.9 1,058.6 .103 Source: Bowen, Leamer and Sveikauskas, American Economic Review , 1987.
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Lecture 12 5 of Professor David Lee AEM-ECON 2300 THE “LEONTIEF PARADOX”: FACTOR CONTENT OF U.S. TRADE Empirical Import K/L Ratio for Study Substitutes Exports Imports/Exports Leontief (1954) Capital $3,091,339 $2,550,780 Labor (person 170 182 years) Capital/person years $18,184 $14,015 1.30 !
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