Ch 4_Factor Endowments - Introduction Chapter 4 Factor...

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1 Chapter 4 Chapter 4 Factor Endowments and the Factor Endowments and the Commodity Composition of Trade Commodity Composition of Trade Tutional BBA International Economics. 2 Introduction Comparative advantage left us some questions. What determines a country’s comparative advantage? How does international trade effect the size of an economy’s various industries? How does international trade effect the payments or return to the factor of production such as labor and capital? How does international trade affect the distribution of income within a country? 3 The Factor-Proportions Theory Explain what caused comparative advantage. Factor-Proportions Theory state that a country’s comparative advantage is determined by its initial resource endowments. Assumptions. 1. Two good, M and C. 2. Perfect competition . . . 3. No transportation costs or taxes on trade. 4. International trade does not cause complete specialization in the production of one of the goods in either country. 4 5. Consumer in the two countries have equal tastes and preference. 6. Two homogenous factor of production, K and L. 7. Same technology + Constant return to scale. 8. Labor and capital are mobile domestically, but cannot move between the two countries. 9. Machine Î Capital intensive. Cloth Î Labor intensive. 10. U.S. Î Capital-abundant India Î Labor-abundant
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5 Production Conditions in the U.S. and India 4 Captial +8 days of labor 10 Capitals +4 day of labor India 4 Captial +8 days of labor 10 Capitals +4 day of labor U.S. Output=10 yrds of cloth Output=1 M Country The capital-to-labor (K/L) ratio for Machine is ......... The capital-to-labor (K/L) ratio for Cloth is ......... 6 The Factor-Proportions Theorem We assumed that consumer in both countries have equal demand conditions.
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