Short3 - E 101: Short Note 3 (Heckscher-Ohlin Model) (*...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
1 E 101: Short Note – 3 (Heckscher-Ohlin Model) (* Lectures are mainly based on our textbook, Krugman’s International Economics: Theory and Policy. Thorough reading of the text in addition to active participation in classes is strongly recommended. This note is just a short list of topics we discuss in class for your reference.) I. Classic Trade Theory 3. Heckscher-Ohlin Model - Comparative Advantage due to Endowment Differences) * Ricardian model shows that free trade based on technology asymmetry benefits every country and there is no economic agent who suffers from trade. * In reality, trade causes income redistribution among different factor owners, and counties show asymmetry in factor endowments .
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 1) Assumptions of H-O model: - two countries (H, F): small countries (with no market powers) - two commodities (industries: Cloth, Food) - two mobile factors: Land (T), Labor (L) - Clothing industry is labor intensive industry, while Food industry is land intensive industry: a LC /a TC > a LF /a TF z ( each unit of cloth production uses labor intensively and each unit of food production uses land intensively z Or a LC /a LF > a TC /a TF z Or, we consider the total resources used in each industry and say that cloth production is labor intensive and food production is land intensive if L C /T C > L F /T F .
Background image of page 2
Production Possibility Frontier 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
- 4
Background image of page 4
5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 2) Factor prices and Input choices Æ Factor price equalization Producers may choose different amounts of factors of production used to make cloth or food. Their choice depends on the wage rate, w , and the (opportunity) cost of using land, the rental rate r . As the wage rate increases relative to the rental rate, producers are willing to use more land and less labor in the production of food and cloth. Recall that food production is land intensive and cloth production is labor intensive.
Background image of page 6
7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Under competition, the price of a good equals the cost of production, and the cost of production depends on the wage rate and the rental rate. The effect of the rental rate of land on the price of cloth depends on the intensity of land usage in cloth production. An increase in the rental rate of land will affect the price of food more than the price of cloth. Under competition, changes in w/r are therefore directly related to changes in P C /P W .
Background image of page 8
9
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 We have a relationship among factor prices and good prices and the levels of factors used in production: Stolper-Samuelson theorem: if the relative price of a good increases, then the real wage or rate of return of the factor used intensively in the production of that good increases, while the real wage or rate of return of the other factor decreases. Under competition, the real wage/return is equal to the
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/01/2008 for the course ECON 101 taught by Professor Jacobson during the Summer '03 term at UCSD.

Page1 / 36

Short3 - E 101: Short Note 3 (Heckscher-Ohlin Model) (*...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online