1 / 39

International Economics

International Economics. Chapter3 The Specific Factor Model. Main Contents The Specific Factors Model International Trade in the specific Factors Model The Political Economy of Trade. Key Terms Budget constrains production function

daphne-todd
Download Presentation

International Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International Economics

  2. Chapter3 The Specific Factor Model Main Contents The Specific Factors Model International Trade in the specific Factors Model The Political Economy of Trade

  3. Key Terms Budget constrains production function Diminishing returns mobile factors marginal product of labor specific factors production possibility frontier Specific factors model

  4. Ⅰ. The Specific Factors Model ⅰ. Assumptions of the model Two goods: manufacture food Three factors: Capital(C) Labor(L) Land(L) The specific factor in producing manufacture The specific factor in producing food

  5. The production function for manufactures: QM=QM(K,LM) The production function for foods: QF=QM(T,LF) LM: the labor used in manufactures LF: the labor used in foods Obviously,LM +LF= L

  6. ⅱ. Production possibility Frontier MPLF MPLM MPLF MPLM LM LF

  7. The production curves QF QM QM=QM(K,LM) QF=QF(K,LF) LM LF

  8. The resources restriction line LM L 450 LF L

  9. QF QF=Q(T,LF) 1` 2` 3` LF QM 1 2 3 QM=Q(K,LM) LM Production Possibility Frontier (PPF)

  10. QF PPF Slope of PP curve=-- MPLF /MPLM The difference between the Ricardo Model and the Specific Factors Model: P43 QM

  11. ⅲ. Prices, Wages and Labor Allocation MPLM ------falls downward because of diminishing returns MPLM*PW ------falls downward accordingly W------falls downward synchronously

  12. MPLF×PF MPLM×PM w` LM LF LM` LF` total labor supply, L The equilibrium of the labor market

  13. At point E, That is to say, At the production point the PPF must to be tangent to a line whose slope is minus the price of manufactures divided by that of food.

  14. Production in the Specific Factors Model QF slope=-(PM/PF )1 1 Q1F PPF QM Q1M

  15. Prices changes and the distribution of labor (1)An equal proportional change in prices PM :+10% PF :+10% w: +10% (2)A change in relative prices PM :+10% PF:unchanged w: rises by less than 10%

  16. W P2F*MPLF P1F*MPLF 2 W2 P2M*MPLM +10% 1 W1 P1M*MPLM LM LF

  17. W P1F*MPLF 2 W2 P2M*MPLM +6% W1 P1M*MPLM 1 LM LF

  18. ⅳ. Relative Prices and the Distribution of Income Suppose, PM rises 10%, w rises 5%(< 10%). • Workers: w/ PM falls, w/ PF rises • The effects on workers are uncertain.

  19. Owners of capital: w/ PM falls, then the cost fall; PM rises, PM / PF rises too, then the purchasing power rises. The welfare of them is better off. Owners of land: w/ PF rises, the costs rises; PM rises, PM / PF rises too, then the purchasing power falls. The welfare of them is worse off.

  20. How about the case if PM drops 10% and PF remains unchanged?

  21. Ⅱ. International Trade in the specific Factors Model Suppose, Japan: abundant in capital America: abundant in land

  22. The pattern of trade Japan produces and exports capital-intensive goods------manufactures (PM/PF)J relatively low America will produce and export land- intensive goods------food (PM/PF)A relatively high

  23. PM/PF RSA RDW RSW RSJ (PM/PF)A (PM/PF )W (PM/PF)J QM /QF

  24. (PM/PF)A (PM/PF)W (PM/PF)J The welfare effects of international trade America:(PM/PF)A falls. The owners of capital: worse off; The owners of land: better off; The owners of labor(workers): uncertain

  25. The welfare effects of international trade (PM/PF)A (PM/PF)W (PM/PF)J Japan:(PM/PF)J rises. The owners of capital: better off; The owners of land: worse off; The owners of labor(workers): uncertain

  26. The general outcome:P55 Trade benefits the factor that is specific to the export sector of each country but hurts the factor specific to the import-competing sectors, with ambiguous effects on mobile factors.

  27. ? ? ? ? ? ? ? Ⅲ. The Political Economy of Trade ⅰ. Lobbying power and trade policies

  28. B: benefit of lobby C: cost of lobby B,C C MB B MC T T*

  29. A cost-benefit model with two benefit groups Production scale Political cost Producers’ surplus Average net benefit ，protectionlism ，free trade

  30. Producers loss about 1.5 billion dollars per year Import quota on sugar Consumers gain about 2 billions dollars per year

  31. ⅱ. The theoretical support of protection- ism 1. The Second Best Theory ① J. Viner: The Customs Union Issue 1950 ② J.E.Meade Graphic example 1955 ③ R.G.Lipsey and K.Lancaster Generalize 1956

  32. E H B C D A t

  33. 2.Game between nations -----prisoner’s dilemma

  34. ⅲ. The reasons that most economists remain strongly in favor of more or less free trade? P58 1.2.3

  35. exercises

  36. 1.If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade were to open up between these two countries, A. the relative price of the capital-intensive product would rise in Australia. B. the world price of the land-intensive product would be higher than it had been in Belgium. C. the world price of the land intensive product would be higher than it had been in Australia. D.the relative price of the land intensive product would rise in Belgium. E.None of the above. Answer: C

  37. 2. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were to open up between these two countries, A. Australia would export the land-intensive product. B. Belgium would import the capital-intensive product. C. Both countries would export some of each product. D. trade would not continue since Belgium is a smaller country. E.None of the above. Answer: A

  38. 3. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were to open up between these two countries, A. the real income of capital owners in Australia would rise. B. the real income of labor in Australia would clearly rise. C. the real income of labor in Belgium would clearly rise. D. the real income of landowners in Belgium would fall. E. the real incomes of capital owners in both countries would rise. Answer: D

  39. Essay Questions In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why? Answer: The major exporting industry located in these two States is Oil extraction and refining. Since the factors of production specific to the oil industry could not shift out of them smoothly and quickly, their real income suffered.

More Related