Supplement_Exercise6

Supplement_Exercise6 - A few notes on exercise set 6: The...

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A few notes on exercise set 6: The Footloose Factors Model aLY=4 aLY*=6 aAY=0.8 aAY*=1 aLX=2 aLX*=5 - Constant marginal costs of production (constant returns to scale) - Factor A is specific in the production of Y - Countries are both small and take prices from a large world market 1 - Comparative and absolute advantage? Comparative advantage: Compare unit labor requirements for both goods The ratio of unit labor requirements determines the minimum relative price of Y at which firms offer a positive return to the the footloose factor A. Below that relative price of Y, a country only produces X. => CA with respect to labor requirements determines which country can attract the footloose factor at a low price of the good that uses the footloose factor (Here it is Foreign)
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Absolute Advantage: Compare unit footloose factor requirements In equilibrium, the return to a factor must be equal to its value marginal product. Since productivity (which is the inverse of the factor requirement) of the footloose
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Supplement_Exercise6 - A few notes on exercise set 6: The...

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