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Chapter 4 Resources, Comparative Advantage, and Income Distribution Chapter Organization A Model of a Two-Factor Economy Prices and Production Choosing the Mix of Inputs Factor Prices and Goods Prices Resources and Output Effects of International Trade Between Two-Factor Economies Relative Prices and the Pattern of Trade Trade and the Distribution of Income Factor Price Equalization Trade and Income Distribution in the Short Run Case Study: North-South Trade and Income Inequality The Political Economy of Trade: A Preliminary View The Gains from Trade, Revisited Optimal Trade Policy Income Distribution and Trade Politics Box: Income Distribution and the Beginnings of Trade Theory Empirical Evidence on the Heckscher-Ohlin Model Testing the Heckscher-Ohlin Model Implications of the Tests Summary Appendix: Factor Prices, Goods Prices, and Input Choices Choice of Technique Goods Prices and Factor Prices
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13 Krugman/Obstfeld • International Economics: Theory and Policy, Eighth Edition Chapter Overview In Chapter 3, trade between nations was motivated by differences internationally in the relative productivity of workers when producing a range of products. In Chapter 4, this analysis goes a step further by introducing the Heckscher-Ohlin theory . The Heckscher-Ohlin theory considers the pattern of production and trade which will arise when countries have different endowments of factors of production, such as labor, capital, and land. The basic point is that countries tend to export goods that are intensive in the factors with which they are abundantly supplied. Trade has strong effects on the relative earnings of resources, and tends to lead to equalization across countries of prices of the factors of production. These theoretical results and related empirical findings are presented in this chapter. The chapter begins by developing a general equilibrium model of an economy with two goods which are each produced using two factors according to fixed coefficient production functions. The assumption of fixed coefficient production functions provides an unambiguous ranking of goods in terms of factor intensities. (The appendix develops the model when the production functions have variable coefficients.) Two important results are derived using this model. The first is known as the Rybczynski effect . Increasing the relative supply of one factor, holding relative goods prices constant, leads to a biased expansion of production possibilities favoring the relative supply of the good which uses that factor intensively. The second key result is known as the Stolper-Samuelson effect . Increasing the relative price of a good, holding factor supplies constant, increases the return to the factor used intensively in the production of that good by more than the price increase, while lowering the return to the other factor. This result has important income distribution implications. It can be quite instructive to think of the effects of demographic/labor force changes on the supply of
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