Unformatted text preview: wment of capital X 20 B
X f1 X h1 (w/r) h C (w/r) f
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
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
trade X 1 No factor
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
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
X2 f XX With factor trade
X 2 output
With factor trade
X 1 output X1 f 15
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
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
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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