February 9 Lecture Notes
February 9 Lecture Notes IR 292
Popular in Fundamental International Economics
Popular in INTERNATIONAL RELATIONS
This 2 page Class Notes was uploaded by Maritt Nowak on Tuesday February 9, 2016. The Class Notes belongs to IR 292 at Boston University taught by James Baldwin in Spring 2016. Since its upload, it has received 29 views. For similar materials see Fundamental International Economics in INTERNATIONAL RELATIONS at Boston University.
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Date Created: 02/09/16
IR 292: Chapter 4 Modern Trade Theory: Adam Smith and David Ricardo assumed that each country would have its own technology, climate, and resources, and that these differences would give rise to productivity HeckscherOhlin (HO) Trade Modle The HO model states that a country’s factors of productions (a country’s endowments of inputs) are used to make each good give rise to productivity differences between countries Why does Japan have absolute advantage? more/labor hour access to high tech equipment workers are very educated high wages (pay impacts your productivity) workers are healthy The U.S. is endowed with a huge variety and abundance of natural resources, skilled labor, and physical capital expectation: agricultural exports that require skilled labor, machinery, industrial goods that need fancy equipment and advanced science and engineering result: actually exports grain that use a lot of machines and few people, but also airplanes that use the capital and skilled labor Factor abundance versus factor scarcit : when a country has relative abundance of something, its relative cost is lower than in a country where it is scarce Gains from Trade in the HO Model: Ricardian model assumed that each country faced a constant set of tradeoffs (constant opportunity cost) because laborers can be moved from industry to industry without any skill variation initial gain (the bad bakers will move to produce steel first, some of them might be decent) eventually, the price gets higher because the good bakers will be producing steel instead (probably not as quick or quality work, while their baking skills were very high) big losses for bread, tiny gain for steel (higher opportunity cost) The HO model: assumptions multiple inputs—labor, capital, farmland (all land is not equally productive) variations in input quality the PPC can’t be assumed to have constant costs each country’s opportunity cost is rising for every type of production as specialization occurs, the opportunity cost increases for each unit switching production the PPC is curved Key Difference in Results from Ricardian Model not really complete specialization just a “lean” towards one thing over the other greater detail in trade explanation actually gives insight into policy industrial policy if you can make an airplane, you can probably make anything) investing in education and healthcare to have more efficient workers and produce more expensive, higher quality goods Trade and Income Distribution: HO provides a sophisticates way to look at gains and losses from trade by dropping the unrealistic assumptions labor has categories of skill (different people are better/not so good at different things) other inputs make a difference (infrastructure, environment, institutions, wages) industries need different mixes of inputs a relationship exists between countries’ factor endowments and trade winners and losers The StolperSamuelson Theorem derived from HO model assumptions wages proportionate to skill capital owners make a profit landowners earn rents income/unit of input depends on supply and demand derived demand: demand for an input high demand outputs have higher prices and the inputs used to make them have higher returns effects on income from opening trade depends on how flexible the affected factors are inflexible labor struggles to move across industries and is hurt much more by specialization ex: avocado producers would be ok with Mexican avocado imports if they could easily grow something else
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