Chapter_3_The_Heckscher-Ohlin_Model

In the free trade equilibrium point b is the

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In the free-trade equilibrium, point B is the production point, and point C is the consumption point. The US exports airport and imports shoes in the trade equilibrium. a) The US Q of aircrafts, QA Q of shoes, QS PPF Relative Price of Aircrafts, slope = - (PA/PS)B A B C domestic consumption domestic production Shoe imports Aircraft exports 20
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Free-trade Equilibrium in China Under free trade, we expect the equilibrium relative price of shoes to rise above the no-trade relative price of shoes in China. China’s production moves from point A* to point B* based on the new relative price of shoes (see the diagram in the next slide). China will produce more shoes and fewer aircrafts. China specializes further in shoes and exports shoes. 21
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Free-trade Equilibrium in China b) China Q of aircrafts, QA Q of shoes, QS A* Relative Price of Aircrafts, slope = - (P*A/P*S)B* PPF* Because the after-trade equilibrium relative price of shoes increases above the no-trade relative price of shoes in China, China’s production moves from point A* to point B* after trade. That is, China produces more shoes and fewer aircrafts after trade. B* 22
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Free-trade Equilibrium in China b) China Q of aircrafts, QA Q of shoes, QS A* Relative Price of Aircrafts, slope = - (PA/PS)B* PPF* Point A* is the no-trade equilibrium. Without trade, both production and consumption occurs at point A*. In the free-trade equilibrium, point B* is the production point, and point C* is the consumption point. China exports shoes and imports aircrafts in the trade equilibrium. B* C* domestic consumption domestic production Shoe exports Aircraft imports 23
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The Heckscher-Ohlin (HO) Theorem A capital-abundant country will have the comparative advantage in producing capital- intensive goods and thus export capital- intensive goods. Similarly, a labor-abundant country will have the comparative advantage in producing labor-intensive goods and thus export labor- intensive goods. 24
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The list of top exports confirm the prediction of the HO theorem. 25
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The Heckscher-Ohlin Theorem Suppose country A is relatively abundant in capital, and country B is relatively abundant in labor. The production of soybeans is more capital intensive than the production of textiles. Then country A will have comparative advantage in ________ and therefore will export _________ 26
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Trade Effects on Income Distribution How do the changes in pre-trade and post- trade relative prices affect the wage paid to labor and the rental earned by capital within each country? 27
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Trade Effects on Income Distribution a) The US Q of aircrafts, QA Q of shoes, QS PPF A B Q of aircrafts, QA Q of shoes, QS B* A* b) China Specialization causes U.S. to increase the demand for capital and China to increase the demand for labor. As a result, the price of capital rises in U.S.
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