Lectures7n8 - The Specific Factors Model: + The...

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The Specific Factors Model: + The Hecksher-Ohlin model Lectures 7 and 8 Chapters 3 and 4 Feenstra and Taylor
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Earnings of Capital and Land • As before, let P M increase with P A constant. Wages rise and labor shifts from agriculture to manufacturing. As more labor is used in manufacturing, the marginal product of capital will rise. As more labor leaves agriculture, the marginal product of land will fall.
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General Conclusion An increase in the quantity of labor used in an industry will raise the marginal product of the factor specific to that industry, and a decrease in labor will lower the marginal product of the specific factor.
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Earnings of Capital and Land Remember MPK M = R K /P M • P M is rising and we know MPK M is rising. • R K must be increasing by more than P M is increasing, in percentage terms. • Also remember R K /P A is amount of food that can be purchased by capital owners. • R K increased, P A fixed, so R K /P A increases. Real rental on capital is the amount of food that can be increased
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Change of Real Rental rates on Capital Since capital owners can afford more of both goods, they are better off when P M rises. The owners of capital are clearly better off under trade than in the no-trade case. This is unlike the case of labor, which could buy more of one good but less of the other.
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Change in the Real Rental on Land Labor leaves agriculture, MPK A falls. – Since MPK A = R T /P A , then R T must fall since P A remains constant. Rental on land in terms of food has decreased. – And P M has increased, so landowners cannot buy as much of the manufactured good either. Landowners are clearly worse off with trade than in the no-trade case.
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General Lesson Specific factors in export industries gain. Specific factors in importing industries lose.
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A Numerical Example Manufacturing: – Sales Revenue = P M Q M = $100 – Payments to Labor = WL M = $60 – Payments of Capital = R K K = $40 Agriculture – Sales Revenue = P A Q A = $100 – Payments to Labor = QL A = $50 – Payments to Land = R T T = $50
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Numerical Example Assume P M increases by 10% and P A remains unchanged. Percentage change in labor is 5% – ΔP M /P M = 10% – ΔP A /P A = 0% ΔW/W = 5% Remember the percent change in wages will be between the percent change in the two industry price changes.
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Numerical Example Change in the Rental on Capital ( 29 ( 29 K R WL W W Q P P P R R K WL Q P R K WL Q P K Capital to Payments R K M M M M M K K M M M K M M M K - = - = - = = : gives changes percentage using Rewriting
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Change in the Rental on Capital – ΔR K /R = (10%*100-5%*60)/40 = 17.5% The percentage increase in rental on capital is greater than percentage increase in the relative price of manufacturing, 10% This holds no matter what, given that the
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This note was uploaded on 04/06/2010 for the course FIN 305W at Pennsylvania State University, University Park.

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Lectures7n8 - The Specific Factors Model: + The...

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