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Explore how the allocation of capital and labor impacts production in developed and less developed countries. Learn about trade equilibrium, production frontiers, and the effects of free trade on textiles and computers.
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Equilibrium before trade Suppose Computers need mostly capital and textiles need mostly labour, and suppose Developed country has mostly capital and the less developed country has mostly labour Textiles O Computers
Equilibrium before trade Suppose initially each country put exactly half their workers in to producing computers and textiles Textiles DC LDC O Computers
Labour abundant LDC If capital and labour were used in the same ratio in both industries then if I want to produce more T or more C then move in a straight line either way along the production frontier Textiles LDC O Computers
Labour abundant LDC But if Textiles are more labour intensive then can produce more, And if computers are capital intensive cannot produce as much Textiles LDC So Production frontier looks like… O Computers
Labour abundant LDC Alternative explanation: As we move down from the spot, to produce more computers we are allocating more capital & workers but since capital is relatively scarce, capital per worker is lower, so not getting much extra production. Textiles LDC O Computers
Labour abundant LDC AND…. As we move UP from the spot, to produce more textiles, we are allocating more workers and capital but workers per machine is rising, so can produce more. Textiles LDC O Computers
Capital abundant Developed Country For DC Textiles are more labour intensive so produce……. LESS Textiles DC LDC O Computers
Capital abundant Developed Country And since Computers are more capital intensive can produce……. MORE Textiles DC LDC So Production frontier looks like… O Computers
Trade Assume initially that each country produces & consumes at the dots Textiles DC LDC O Computers
Note in LDC Computers will be RELATIVELY expensive, e.g, Pc /Pt = 2/1 while in DC they will be relatively cheap e.g. Pc /Pt =1/2 Textiles DC LDC O Computers
Now suppose we allow free trade……. And have a common price that lies in between Textiles DC LDC O Computers
Now suppose we allow free trade……. And have a common price that lies in between LDC EXPORT DC IMPORTS Textiles IMPORT DC LDC DC EXPORT O Computers