07 Heckscher-Ohlin Model, Part 2

07 Heckscher-Ohlin Model, Part 2 - Heckscher-Ohlin Model,...

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1 1 Heckscher-Ohlin Model, Part 2 • Agenda: – Resources and Output – Effects of International Trade • Relative Supply, Relative Demand, Relative Prices • The Pattern of Trade – Trade and the Distribution of Income 2 Resources and Output T / L P C / P F w / r 3 Resources and Output 0 C L C L F 0 F T F T C 4 Resources and Output 0 C L C L F 0 F T F T C
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2 5 Resources and Output • Given the prices of cloth and food and the supplies of land and labor, it is possible to determine how much of each resource the economy devotes to the production of each good. – This also determines the economy’s output of each good through a production function or PPF. 6 Resources and Output Q C Q F 7 Resources and Output Q C Q F 8 Resources and Output T / L P C / P F w / r
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3 9 Resources and Output 0 C L C L F 0 F T F T C 10 Resources and Output • What happens to these output when the economy’s resources change? – Suppose that the economy’s supply of land is increased, holding both goods prices and the labor supply fixed. 11 Resources and Output 0 C L C L F 0 F T F T C 12 Resources and Output • The quantities of labor and land used in cloth production actually fall , from L C1 and T C1 to L C2 and T C2 . – An increase in the economy’s supply of land will lead to a fall in the output of the labor-intensive goods, if relative prices are held constant .
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4 13 Resources and Output Q C Q F 14 Resources and Output • An increase in the supply of land (labor) expands production possibilities disproportionately in the direction of food (cloth) production. 15 Resources and Output • An economy with a high ratio of land to labor is predicted to have a high output of food relative to cloth and a low price of food relative to cloth. – It will be relatively (in)efficient, i.e., has a comparative advantage, in producing food (cloth). 16
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07 Heckscher-Ohlin Model, Part 2 - Heckscher-Ohlin Model,...

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