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Chapter_3_The_Heckscher-Ohlin_Model

And the price of labor rises in china until factor

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and the price of labor rises in China until factor costs are equal in the two countries. PPF* The US production moves from A to B after trade. China’s production moves from A* to B* after trade. 40
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41
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The Factor Price Equalization Theorem Given all the assumptions of the Heckscher- Ohlin model , free international trade will lead to the international equalization of individual factor prices. Note that two important assumptions must hold to have factor price equalization: (1) no barriers to trade (2) access to identical technology 42
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Immigration to the US Today 44
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Immigration to the US Today The category of workers without a high school degree has the largest percentage of foreign born workers. The group of workers with Ph.D.s has the next largest percentage of foreign-born workers. The middle educational levels, which comprise about 80% of the U.S. labor force, has the lowest percentage of foreign-born workers. 45
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Long-run Effects of Immigration Assume that all factors are free to move between industries. Assume that only capital and labor are used to produce shoes and computers. Assume that shoes and computers can be traded internationally without any trade barriers. Assume that labor can move between countries. This is an extension of the HO model. 46
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Long-run Effects of Immigration Computers are capital intensive and shoes are labor intensive. As before, LS/KS > LC/KC and KC/LC > KS/LS Again we can see the PPF and show the free- trade equilibrium output at point A (next slide). The tangency between the PPF and the world relative price line under free trade. How is the equilibrium affected by the inflow of labor due to migration? 47
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Pre-Immigration Equilibrium 48
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Long-run Effects of Immigration on Industry Outputs Because shoes are labor intensive, the increase in labor will lead the PPF to shift out more in the direction of shoes (the next slide). Since the world prices are unchanged (we are looking at a small open economy that has no influence on the world prices), the economy moves to equilibrium at point B (the next slide). More shoe production and less computer production This only holds in the long run. 49
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Long-run Effects of Immigration on Industry Outputs Output of Computers, QC Output of Shoes, QS Relative Price of Computers, - PC/PS Shift in Home PPF due to immigration An increase of both capital and labor in shoe production causes an increase in shoe output and a decrease in computer output A B 50
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Long-run Effects of Immigration on Industry Outputs The long run result we just showed was named after economist T.N. Rybczynski, who first discovered it. Rybczynski Theorem: In the Heckscher-Ohlin model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry.
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