08 Heckscher-Ohlin Model, Part 3

08 Heckscher-Ohlin Model, Part 3 - Heckscher-Ohlin Model...

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1 1 Heckscher-Ohlin Model, Part 3 • Agenda: – Factor-Price Equalization – Short-Run Income Distribution • Trade and Income Inequality – The Political Economy of Trade – Empirical Evidence 2 Factor-Price Equalization Without trade , – labor-abundant Home has a lower relative price of cloth than land-abundant Foreign, and – labor would earn less and land would earn more in Home than in Foreign. 3 Factor-Price Equalization T / L P C / P F w / r CC FF SS P C / P F P* C / P* F w/r w*/r* T C / L C T C / L C T* C / L* C T* C / L* C 4 Factor-Price Equalization With trade , – the relative prices of goods in Home and Foreign converge, – and a convergence in the relative price of land and labor in Home and Foreign.
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2 5 Factor-Price Equalization T / L P C / P F w / r CC FF SS P C / P F P* C / P* F w/r w*/r* T C / L C T C / L C T* C / L* C T* C / L* C 6 Factor-Price Equalization • Factor-price equalization occurs because more is happening than the simple exchange of goods when Home and Foreign trade with each other. –In an indirect way , the two countries are in effect trading factors of production . 7 Factor-Price Equalization Alternatively , – trade increases the demand for goods produced by the abundant factors and, – this indirectly increases the demand for the abundant factors and, – raises the factor prices of the abundant factors across countries. 8 Factor-Price Equalization • This explanation of international trade and factor-price equalization is simple and appealing. – However, in the real world, factor prices are NOT
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3 9 Factor-Price Equalization False assumptions in the H-O Model: 1. Both countries produce both goods, which are identical. 2. Both countries have the same technologies.
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This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at Berkeley.

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08 Heckscher-Ohlin Model, Part 3 - Heckscher-Ohlin Model...

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