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International Economics

International Economics. Chapter 4 Resources and Trade: The H-O Model. Main Contents A Model of A Two-Factor Economy Effects of International Trade Between Two- Factor Economies Empirical Evidence on the H-O Model.

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International Economics

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  1. International Economics

  2. Chapter 4 Resources and Trade: The H-O Model Main Contents A Model of A Two-Factor Economy Effects of International Trade Between Two- Factor Economies Empirical Evidence on the H-O Model

  3. Key terms Abundant factor scarce factor Factor abundance Factor intensity Biased expansion of production possibility Factor proportions theory Heckcher-Ohlin Model Leontief paradox

  4. Recall the former two models: the pattern of trade: comparative advantage the base of trade: international difference in the productivity of labor the effects of trade on income distribution: the factor specific to exports: better off the factor specific to imports: worse off the mobile factor: uncertain

  5. Ⅰ. A Model of A Two-Factor Economy ⅰ. Assumption: 2× 2 two factors: L(labor), T(land) two goods: C(cloth), F(food) aLC , aTC; aLF, aTF;w; r L=LC+LF= LC(wC)+LF(wF) T=TC+TF=TC(rC)+TF(rF)

  6. W/r is high W/r is low L is relatively expensive T is relatively expensive Much T will be used More L will used T/L will be lower T/L will be higher

  7. w/r C F (w/r)* When w/r =(w/r)*, (T/L)CC ＜(T/L)FF Cotton is labor-intensive. Food is land-intensive. C F (T/L)CC (T/L)FF T/L

  8. How to judge factor intensity in producing a good? In the production of apples T/L=1/2 In the production of shoes T/L=1/5 In the production of computer T/L=1/10 Exercise: P87.1

  9. ⅱ. Factor Prices and Goods Prices W/r L becomes relatively more expensive The cost of cotton becomes higher PC/PF T becomes relatively more expensive W/r The cost of food becomes higher PC/PF

  10. S w/r PC/PF C F C F S w/r T/L

  11. w/r C S F C PC/PF T/L F S

  12. Factor Prices Goods Prices Input Combination PC/PF w/r T/L ① ② PC/PF The owner of labor: better off The owner of land: worse off

  13. ⅲ. Resources and Output LF: labor used in food production TF: land used in food production TC:land used in cotton production LC : labor used in cotton production

  14. L QF LF T TF T TC QC LC L

  15. L2F L1F Q2F Suppose T increases, Q1F T1F T2F T2C 1 T1C 2 QC L2C L1C

  16. LC , TC T QF LF , TF

  17. QF 2 Q2F slope=--PC/PF 1 Q1F slope=--PC/PF QC Q2C Q1C The production possibility frontier in the Two-Factor Economy

  18. Conclusion:P75 Generally, an economy will tend to be relatively effective at producing goods that are intensive in the factors with which the country is relatively well-endowed.

  19. Ⅱ. Effects of International Trade Between Two-Factor Economies H-O Theorem Which deals with the pattern of trade The H-O Theory Factor-Price Equilibrium Theorem Which deals with the effect of trade on factors prices

  20. ⅰ.Assumptions ① 2× 2× 2; ② Both nations use the same technology in production; ③ Both nations produce both goods; ④ Trade actually equalizes the prices of goods in the 2 nations; ⑤Others: tastes,transportation costs,tariffs,……

  21. Commodity prices Factor prices Derived demand for factors Demand for final commodities Distribution of ownership of factors Supply of factors Tastes technology General Equilibrium Framework of The H-O Model

  22. ⅱ. The pattern of trade ①How to judge the factor abundance Home:20 million workers, 20 millions acres land 1:1 Foreign:80 million workers, 200 million acres land 1:2.5 Conclusion:Home’s labor-abundant; Foreign’s land-abundant.

  23. ②The production possibility frontiers of Home and Foreign C is L-intensive, H is L-abundant; F is T-intensive, F is T-abundant.

  24. QF PPF of Home Q`F PPF of Foreign QC Q`C

  25. ③ The pattern of trade and the effects of trade RS* PC/PF RD RSW RS F W H (QC+Q*C)/(QF+Q*F)

  26. Home: QC/QF export cotton Results1: the pattern of trade Foreign:Q*C/Q*F export cloth Conclusion: Countries tend to export goods whose production is intensive in factors with which they are abundantly endowed. P76

  27. Results2: the effects on income distribution The owner of labor: better off Home The owner of land: worse off The owner of labor: worse off Foreign The owner of land: better off Conclusion: owners of a country’s abundant factors gain from trade, but owners of a country’s scarce factors lose. P77

  28. ⅲ. Factor Prices Equalization Trade actually equalizes the relative prices in the 2 nations: PC/PF = (PC/PF)W= P*C/P*F PC/PF w/r So the equalized good prices result in the equalization of factor prices.

  29. Ⅲ. Empirical Evidence on the H-O Model ⅰ. Comparative International Wage Rates See table 4-1 on Page 78, the practical data are inconsistent with Factor-Equalization Theorem. The reasons include 3 points. ⅱ. Leontief paradox Some new theories can explain Leontief paradox.

  30. exercises

  31.  1. Assume that only two countries, A and B, exist. Consider the following data: Countries Factor Endowments A B Labor Force 45 20 Capital Stock 15 10  If good S is capital intensive, then following the Heckscher-Ohlin Theory, • country A will export good S. • country B will export good S. • both countries will export good S. • trade will not occur between these two countries. • Insufficient information is given. Answer: B

  32. Essay Questions “No country is abundant in everything.” Discuss. the concept of relative (country) factor abundance is (like factor intensities) a relative concept. When we identify a country as being capital intensive, we mean that it has more capital per worker than does the other country. If one country has more capital worker than another, it is an arithmetic impossibility that it also has more workers per unit capital.

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