lecture note 10

7 factor prices with technology differences oy x2

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Unformatted text preview: wment of capital X 20 B A C p* p* X f1 X h1 (w/r) h C (w/r) f A Ox X1 Endowment of labor 12 If Silicon Valley has a higher productivity in computer hardware and software, then engineers will move there. They may move from where they are scarce to where they are abundant. This is commonly referred to as “brain drain”. 2. Distortions: e.g, a production subsidy to X1 Suppose that we have two absolutely identical countries except country h subsidizes X1 production. Country h has a higher price for L (used intensively in X1) and a lower price for K. (Stolper - Samuelson theorem) 13 If labor is allowed to move, it will flow into h and h will becomes even more specialized in X1, f will become more specialized in X2 (Rybczynski theorem). The volume of trade will increase: trade in goods and factors are complements. 3. Increasing returns to scale Suppose that two identical economies specialize. Figure 15.8 They the economy that specializes in the capital-intensive good will have a relatively high price for capital and vice versa for the country specializing in the labor-intensive good. Figure 15.8: Specialization with identical countries X2 Figure 15.9: Adding factor trade K g No factor trade X 2 g With factor trade X 2 f A2 D E A1 With factor f trade X 1 No factor g trade X 1 X2 g L Figure 15.9 14 Then capital will flow to the country specializing in the capital intensive good, expanding that sector further. Factor trade can make the initially-identical country different in relative endowments. Figure 15.10 This is also the key insight of the so-called “new economic geography”, in which an initial equilibrium with countries having identical factor endowments is unstable. Differences in factor endowments arises endogenously if factors can move. Ex post, countries will be relatively well endowed with factors used intensively in their export industry. Mimics HeckscherOhlin! Figure 15.10: Factor trade and goods trade X2 f XX With factor trade X 2 output With factor trade consumption Df With factor trade X 1 output X1 f 15 Summary 1. There are many possible types of trades, some of which may be equivalent in welfare and factor-price (income distribution) outcomes, but which look very different statistically. Goods can be traded for goods, or factor service trade can substitute for goods trade. E.g., a country can export capital instead of capital intensive good. 2. In some cases, trade in goods exhaust all possible gains from trade; in particular, this occurs if trade in goods results in factor-price equalization. 3. In the case of the Heckscher-Ohlin model, trade in goods may not equalize factor prices do to specialization and/or trade costs. There are additional gains to be achieved by trading factors. 16 While trade in goods and factors are welfare complements, they are substitutes in terms of trade volumes in the HO model. 4. For many other underlying causes of trade, trade in goods and factors are both welfare and trade-volume complements. When countries have identical factor endowments but ricardian differences in technolo...
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This document was uploaded on 03/09/2014 for the course ASTRO 3730 at Colorado.

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