The_Heckscher-Ohlin_Model__Lesson_18_

# The_Heckscher-Ohlin_Model__Lesson_18_ - Some Mechanics of a...

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1 Lesson 18 1 Some Mechanics of a Two-Factor Economy What kind of structure gives rise to a PPF that exhibits increasing opportunity cost? In this lesson, we continue to assume two goods, but we now also assume two inputs (factors of production) Lesson 18 2 Call the two inputs Labor ( L ) and Capital ( K ) Technology consists of a listing of all ways that K and L can be combined to produce output. Assume that K and L can easily move between sectors Lesson 18 3 As in previous lessons: amount of labor used to produce unit of LX a one X = amount of labor used to produce unit of LY a one Y =

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2 Lesson 18 4 Now we have the additional notation amount of used to produce unit of KX a capital one X = amount of used to produce unit of KY a capital one Y = Lesson 18 5 We continue to assume that technology is characterized by constant returns to scale That is, increasing the use of all inputs by a given percentage results in output increasing by the same percentage E.g., if we double the amount of labor and capital used in production of good X , we double the amount of X produced Lesson 18 6 Calculate the amount of labor used to produce the two goods: amount of labor used to produce units of LX X X aQ QX = amount of labor used to produce units of LY Y Y QY =
3 Lesson 18 7 For labor to be fully employed, the total amount of labor used to produce each of the goods has to add up to the total available: LX X LY Y aQ aQ L += Lesson 18 8 We can graph the full-employment condition for labor X Q Y Q LX La LY Slope = LX LY a a Lesson 18 9 If this were the end of the story, this graph would represent the PPF (as in the Ricardian model) X Q Y Q LX LY Slope = LX LY a a

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## This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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The_Heckscher-Ohlin_Model__Lesson_18_ - Some Mechanics of a...

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