lecture note 10

2 and 153 into 151 the latter can be written as 7 154

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Unformatted text preview: ) into (15.1), the latter can be written as 7 (15.4) This can be re-arranged to yield (15.5) The trade balance condition: the sum of the value of exports over all goods i plus the sum of the value of factor exports (the difference between each factor’s endowment and use) over all factors j must equal zero (15.6) This can be rearranged to yield 8 (15.7) Autarky market clearing condition is that the supply and demand of each good are equal. (15.8) Substitute (15.7) for the left-hand side of (15.5) and substitute (15.8) for the right-hand side of (15.5). The latter then becomes (15.9) Free trade consumption is revealed preferred to autarky consumption, which was to be proved. Free trade in goods and factors in a competitive, undistorted economy must be better than autarky. Factor trade and commodity trade as substitutes Heckscher-Ohlin Model 1. Factor prices are equalized by trade and there is no reason to add factor trade to commodity trade. 2. Countries are sufficiently different such that they are specialized in trade: then each country has a relatively high price for its scarce factor, the factor used intensively in its import competing industry. Figure 15.2 Figure 15.3 Allowing factors to move implies that relative factor endowment differences will be reduced and in general trade will be reduced. 9 Figure 15.2: Specialization and Relative Factor Prices Figure 15.3: Factor trade outside the FPE set Of h spec in X2 an/or f in X1 K World Capital Endowment (w/r) h Eh X1 X2 w/r Ef E X2* FPE Set X1* h spec in X 1 and/or f in X 2 (w/r) f Oh L World Labor Endowment 10 Trade in goods and factors are substitutes 3. Trade barriers prevent commodity prices from being equalized, and so factor prices are not equalized. Each country has a relatively high price for its own import good, and thus a relatively high price for its scarce factor (Stolper-Samuelson theorem). Factor trade tends to equalize relative endowments and thereby reduce or even eliminate trade. Trade in goods and factors are substitutes. Figure 15.4 Figure 15.5 Figure 15.4: Trade Costs and Factor Prices Figure 15.5: Factor trade with trade costs Of X f2 X h2 Unit value isoquants: e.g., $1 of X 1 or X 2 (w/r) f World Capital Endowment h spec in X 2 an/or f in X 1 K E No Trade Set h spec in X 1 and/or f in X 2 (w/r) Oh X f1 X h1 L World Labor Endowment 11 Factor Trade and Commodity Trade as Complements 1. Differences in technology: add Ricardo to Heckscher-Ohlin. Suppose that country h has a superior technology in X1, the labor intensive sector. But suppose that countries have equal relative endowments of both labor and capital. Country h will produce relatively more X1 in free-trade (in goods) equilibrium. But this will bid up the price of labor in country h. Then labor should flow to country h until all X1 is produced in country h. Trade in goods will increase. Figure 15.6 Figure 15.7 Figure 15.6: Country h has technical advantage in X 1 Figure 15.7: Factor prices with technology differences Oy X2 Endo...
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