05%20Heckscher-Ohlin%20Model,%20Part%202

05%20Heckscher-Ohlin%20Model,%20Part%202 - Heckscher-Ohlin...

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1 1 Heckscher-Ohlin Model, Part 2 • A Free Trade Equilibrium – An Autarky Review – The Free Trade Economy Equilibrium • The Pattern of Trade • Factor Prices • The Distribution of Income 2 Autarky Equilibrium Q M Q C PPF Q M Q C “A” Isovalue-budget line; slope = - (P M /P C ) 0 3 Autarky Equilibrium Q* M Q* C PPF* Q* M Q* C “A” Isovalue-budget line; slope = - (P* M /P* C ) 0 4 Autarky Equilibrium Q C Q* C Q M Q* M P C / P M , RD US = RD* C RS* C RS US ( P C /P M ) US ( P* C /P* M ) C
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2 5 Autarky Equilibrium K L P C P M w / r CC MM SS P* C P* M w*/r* K* C L* C K* M L* M P C P M w/r K M L M K C L C 6 Free Trade Equilibrium Once free international trade begins, relative goods prices in the 2 countries converge. The relative price of clothing falls in the U.S. The relative price of clothing rises in China. 7 Free Trade Equilibrium P C / P M RD US = RD* C RS* C RS US ( P C /P M ) US ( P* C /P* M ) C Q C + Q* C Q M + Q* M 8 The Pattern of Trade • How does the convergence of the relative prices of clothing translate into a pattern of international trade ?
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3 9 The Pattern of Trade Q M Q C PPF D M = S M D C = S C “A” Isovalue-budget line; slope = - (P M /P C ) 0 CIC 0 10 The Pattern of Trade Q* M Q* C PPF* D* M = S* M D* C = S* C “A*” Isovalue-budget line; slope = - (P* M /P* C ) 0 CIC* 0 11 The Pattern of Trade • The convergence of relative prices leads to the following pattern of trade: – The U.S.—the capital abundant country—exports machinery—the capital intensive good. – China—the labor abundant country—exports
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05%20Heckscher-Ohlin%20Model,%20Part%202 - Heckscher-Ohlin...

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