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WK4_5Sept_Ch_4

WK4_5Sept_Ch_4 - Week 4(Tuesday Sept 6 2011 Review final...

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Review final portion of previous Lecture Introduce Chapter 4 Trade: Factor Availability and Factor Proportions are Key Week 4 (Tuesday, Sept. 6, 2011)
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Suppose Wheat, Cloth and Shoes Suppose: a w /a w * < a s /a s * < a c /a c * U.S. exports W U.S. imports C Case 1: a w /a w * = .5 < a s /a s * = .75 < a c /a c * = .90 Case 2: a w /a w * = 1.3 < a s /a s * = 1.5 < a c /a c * = 4.0
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What about S? Need ω/ω* When P w /P w * = ωa w / ω*a w * < 1 RoW imports (a w /a w *) < ( ω*/ω) When 1 < ωa C / ω*a C * = P C /P C * RoW exports ( ω*/ω) < (a c /a c *) Key: (ω*/ω) vs (a s /a s *) High Foreign wages hurt High Foreign wages offset by productivity advantage
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What about S? Case 1 a w /a w * < a s /a s * < a c /a c * (ω*/ω) Row export S Case 2 a w /a w * < a s /a s * < a c /a c * (ω*/ω) RoW import S ω* influenced by the average level of the a’s
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How well does it predict? Testing the Ricardo Model
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Data for U.K. and U.S. exports to third countries shortly after WWII U.S. Exports to i/U.K Exports to i U.S. industry ABSOLUTELY more productive in all 13 industries for which data was available U.S. wages over 2x those in U.K. GDA MacDougall’s 1954 Study
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G.D.A. MacDougall’s 1951 Data U.S. Exports to Output per Third Market U.S. Worker (Market Share) Industry ------------------- -------------------- U.K. Exports to Output per Third Market U.K. Worker (Market Share) Pig Iron 3.6 5.1 Motor Cars 3.1 4.3 Machinery 2.7 1.5 Glass Containers 2.4 3.5 Paper 2.2 1.0 Cigarettes 1.7 .47 Leather Footwear 1.4 .32 Hosiery 1.8 .30 Cotton Spinning 1.5 .11 Beer 2.0 .056 Cement 1.1 .091 Wool 1.35 .004 Apparel 1.25 .044 a uk a uk a us a us
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(ω*/ω) and (a s /a s *) (ω*a s *)/(ωa s )
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Trade patterns between countries are determined to a significant degree by relative differences in their labor productivities. This simple theory has impressive empirical support. Conclusion
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Consider New Theory
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Recall: Basic Determinants of Prices Demand: Tastes or preferences Income Supply: Technology** Ch. 3--Ricardo Cost of inputs ** Ch. 4—Hecksher- Ohlin Government Policies: Taxes, subsidies
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