Economics%20116%20-%20Lecture%204%20-%20Final

Economics%20116%20-%20Lecture%204%20-%20Final - Economics...

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Economics 116: Economic Development UC San Diego, Spring 2009 Prof. Karthik Muralidharan Department of Economics Lecture 4
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Administrative Stuff Problem Set 1 – Start DOING it; you’ll be in trouble for the exam if you are not totally on top of working out the details Part B will be up by tomorrow; all answers on Monday Midterm is next Thursday – in class TA Weekly Review Sessions: Center 214 on Mondays from 5:00 – 5:50pm Go to office hours if you can’t make this session TA Office Hours: Aaron: Monday 10-11am, SH207 Hee-Seung: Tuesday 9-10am, SH 232 JJ: Thursday 9-10am, SH 234 Lecture slides on the course web page (PPT version) Lunch and office hours
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Lecture Outline (4/9/09) Factoral Terms of Trade Matsuyama model of agriculture and industry Murphy-Shleifer-Vishny model of market size
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Terms of Trade (1) Terms of trade are the terms on which a country can exchange it’s exports for imports from another country What determines the terms of trade? The productivity of labor in the sector that is common to both countries! Why? Because labor can move across sectors within the same country and in equilibrium must earn the same amount in both sectors within the same country
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Terms of Trade (2) Cash Crops Food Crops Manufactur es Region 1 q C 1 q F 1 Region 2 q F 2 q M 2 Output per Labor Hour • Consider the price of food to be 1 • How do you calculate the terms of trade? • The key point is that labor across sectors within a region, but not across regions! •Assume that labor is paid it’s marginal value product. •Then, in equilibrium, we must have: 1 2 2 2 2 1 1 1 1 1 M F M F M M C F C F C C q q p w q q p and q q p w q q p = = = = = =
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Terms of Trade (3) 1 2 2 2 2 1 1 1 1 1 M F M F M M C F C F C C q q p w q q p and q q p w q q p = = = = = = imply that: 2 1 2 1 F F q q w w = and: 2 2 1 1 M F C F M C q q q q p p =
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Terms of Trade – Numerical Example
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Terms of Trade - Summary Main point of exercise above is to show that a region can only improve its factoral or commodity terms of trade by
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This note was uploaded on 05/06/2010 for the course ECON ECON 116 taught by Professor Muralidharan during the Spring '09 term at UCSD.

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Economics%20116%20-%20Lecture%204%20-%20Final - Economics...

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