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ECON 503 Week 2 Notes

by: Tulsi

ECON 503 Week 2 Notes ECON 503 001

GPA 3.954

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About this Document

international trade economics week 2 notes hauk
International Trade Economics
William Hauk
Class Notes
Economics, trade, International, Econ, usc, notes
25 ?




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This 4 page Class Notes was uploaded by Tulsi on Monday September 5, 2016. The Class Notes belongs to ECON 503 001 at University of South Carolina taught by William Hauk in Fall 2016. Since its upload, it has received 5 views. For similar materials see International Trade Economics in Economics at University of South Carolina.


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Date Created: 09/05/16
Week 2 Tuesday, August 30, 21:29 PM 8/30/16 HOME country: has the comparative advantage in WINE One worker produces: 4 bottles wine or 2 yards cloth 25 workers Q c MPL =c2 Autarky real wages: MPL = 4 w/P c MPL = c w Slope = -2/3 w/P w MPL = w With trade 50 World price line Autarky equilibrium (no trade) Indifference curve Slope = PPF: production possibilities frontier 100 Qw This will increase once trade starts FOREIGN country: has the comparative advantage in CLOTH One worker produces: 1 bottle wine or 1 yard cloth 100 workers Autarky real wages: Qc* Production with trade MPLc * = 1 w*/P c= MPL *c 1 100 MPL *w= 1 w*/P w= MPL *w 1 Autarky equilibrium Indifference curve Slope = PPF: production possibilities frontier 100 Q w Will decrease when open to trade Week 2 Page 1 Trading Equilibrium: Home exports wine, imports cloth Foreign exports cloth, imports wine Prices converge to Pw/Pc = 2/3 -3 bottles of wine for 2 yards of cloth Home country: wages in wine industry rise Wages in cloth industry fall -all workers go to wine industry Foreign country: -all workers go to cloth industry Home Country Real Wages with Trade w/Pw = 4 w = Pw * MPLw Divide by Pc on both sides w = 2/3*4 = 2.6667 Workers in home country are better off with trade Foreign Country Real Wages with Trade w/Pc = MPLc = 1 w = Pc * MPLc Divide by Pw on both sides 3/2 * 1 = 1.5 Workers in foreign country are better off with trade World Market for Wine Pw/Pc Quantity of wine traded 9/1/16 Week 2 Page 2 9/1/16 Specific Factors Model of Trade -Two goals: agriculture and manufacturing -Three factors of production: land, labor, capital -land and labor: agriculture -labor and capital: manufacturing -two countries: home and foreign Manufacturing Industry Production function: Qm = Am *F(K, Lm) Costs: w*Lm; r k k rk: rental rate of capital Π m Pm * A*F(K, Lm) -w*Lm- r * Kk Pm * MPLm = Wm rx= 0 Cobb Douglas Production Function α 1-α Qm = Am * K * L MPLm =dQm/dLm = (1-α) Am * K * L α -α α MPLm = (1-α )Am(K/L) If Am goes up, MPLm goes up If (K/Lm) goes up, MPLm goes up (if the ratio of capital to labor in manufacturing increases, marginal product of labor in manufacturing increases) MPKm = dQm/dK = αAmK α-1Lm α-1 1-α MPKm = αAm(L/K) If Am goes up, MPKm goes up If (Lm/K) goes up, MPKm goes up If Aa goes up, MPLa goes up If (La/N) goes up, MPN goes up, r noes up (return on land ownership) N is land If (N/La( goes up, MPLa goes up rn= Pa*MPNa w a Pa*MPLa Week 2 Page 3 QA In autarky equilibrium -both goods are produced, so wages are equalized w A w M Pa * MPLa = Pm * MPLm MPLa/MPLm = Pm/Pa Q M Labor Market Total Supply of Labor Week 2 Page 4


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