ECON 4040 Lecture PP Chpt 4 FactEndow

ECON 4040 Lecture PP Chpt 4 FactEndow - Comparative...

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Comparative Advantage and Factor Endowments Chapter 4: A Different
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Smith and Ricardo believed productivity differences and hence comparative advantage were a result of each country’s unique technology. Ricardo considered a single homogenous factor of production (labor) and would not have been able to produce comparative advantage without technological differences between countries. ( exogenous source of CA ) Ricardian Model
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Nations are endowed with different levels of factor inputs (land, labor, capital and entrepreneurship). What is the role of factor endowments in motivating trade? A Swedish economist and his students considered this question. Factor Endowments
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Dr. Bertil Ohlin Born: 23 April 1899 Died: 3 August 1979 Contribution: Founder of the modern theory of international trade. Field: International Hecksher-Ohlin Model of Trade
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Based a country’s comparative advantage on its factor endowment , rather than differences in technology (via labor). The H-O model differs from Ricardo's most drastically by assuming that the production functions available in each country are identical. The production functions convert labor and capital input to output. Hecksher-Ohlin Model of Trade
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Source of Comparative Advantage Source of comparative advantage
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Basic Assumptions
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Countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor(s). A country’s comparative advantage lies in the production of goods that intensively use relatively abundant factors. The H-O Theorem
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Comparative advantage is determined by a nation’s factor endowment. Once this is determined, it should be possible to predict the goods a country exports and imports.
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Relative abundance of a factor implies that in autarky its relative cost is less than in countries where it is relatively scarcer. Relatively scarce resources are more expensive. Relative Factor Endowment
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Factor Endowment UNITED STATES CANADA Capital 50 machines 2 machines Labor 150 workers 10 workers Example
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The U.S. has a comparative advantage in production that uses relatively more capital.
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This note was uploaded on 02/07/2012 for the course ECON 4040 taught by Professor Staff during the Summer '08 term at University of Georgia Athens.

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ECON 4040 Lecture PP Chpt 4 FactEndow - Comparative...

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