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lec04-eco101-10 - International Trade Lecture 4 c...

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International Trade Lecture 4 c Marc-Andreas Muendler University of California, San Diego October 5, 2010
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4. Comparative Advantage due to Endowment Differences Econ 101, c M. Muendler Specific Factors and Labor Productivity The Specific Factors Model is also called the Ricardo-Viner model With the Ricardo model, it shares the fact that labor productivity dif- fers across sectors Novel explanation: endowments of the specific factor determine labor productivity in the industry that uses the specific factor Different insight: labor productivity is no longer constant but drops with larger employment
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4. Comparative Advantage due to Endowment Differences Econ 101, c M. Muendler The Production Possibility Frontier 0 Q M Home food output Home manufactures Q F L M L F 45 O L L Manufacturing employment Food sector employment Q K L M M ( , ) =Q M Q T L F F ( , ) =Q F PPF
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4. Comparative Advantage due to Endowment Differences Econ 101, c M. Muendler Marginal Product of Labor and Labor Demand Diminishing marginal returns of labor in both sectors (reflected in curvature of production functions) Food: MPL F = ∂Q F ( ¯ T,L F ) ∂L F = (1 - α ) · A · ( ¯ T/L F ) α Manufacturing: MPL M = ∂Q M ( ¯ K,L M ) ∂L M = (1 - α ) · A · ( ¯ K/L M ) α Demand for labor: Profit-maximizing firms employ labor until marginal revenue from an additional person-hour equals its cost, P F · MPL F ( L F ) = w and P M · MPL M ( L M ) = w.
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4. Comparative Advantage due to Endowment Differences Econ 101, c M. Muendler Marginal Product of Labor and its Allocation How much labor will be employed in each sector? Labor is mobile. So, wages are equal in both sectors in equilibrium, P F · MPL F ( L F ) = P M · MPL M ( L M ) = w.
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