Economics Notes- week 3
Economics Notes- week 3 ECON 270
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This 9 page Class Notes was uploaded by Hewan Ft on Thursday September 15, 2016. The Class Notes belongs to ECON 270 at James Madison University taught by Bob Horn in Fall 2016. Since its upload, it has received 5 views. For similar materials see International economics in Economics at James Madison University.
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Date Created: 09/15/16
Econ270 Week 3 What is the factoring governing the exports of a country Ex. 1 if Saudi arabia exports oil, it is because they have an abundance in natural resources Ex. 2 China exports low manufacturing goods because they have a lot of low skilled labour. Factors of production: 1 natural resources land 2 labour skilled & unskilled 3 capital A country will produce and export products in whichever resource they have the abundance in. So if we look at factor abundance, we see it is going to be determining a countries comparative advantage. Output will depend on multiple inputs from the different combinations of factors of production. When looking at factors of abundance we call it the HO model (Heckscherohlin trade model) Ex. If we have two places home and away > Home: has 40 machines (K capital) and 200 workers(Labour) > Away: has 10 machines(K) and 60 workers(L) Looking at “relative scarcity” which is the capital/labor ratio= K/L Home = K/L= 40/200= ⅕ away= kK/L= 10/60= ⅙ SO HOMES CAPITAL ratio is greater than aways so home is capital abundant So AWAY IS labour abundant. If we have a lot of capital abundant goods at home, it would imply that the price of capital would be relatively lower at home. Whereas “away” will have a low cost for labour. Therefore home is going to produce and export capital intensive goods= machines Away is going to produce and export labour intensive = workers Quality of output = Q Q=F(L&K) Wine beer This curved ppc means for every beer we choose to produce we lose more wine and it increases our cost as we move down curve. Everytime we move from one input to the next, our ppc curves more. Ex. 1 Germany wine beer Red line= terms of trade line Black line when germany was making the most beer it can while loses as little as it can be It is better to be producing at black line POINT B than at the trade line because any point below point b germany will have be paying for wine at a higher rate and its opportunity cost would be too expensive. Any point above B is a benefit for germany WINE BEER Germany is producing w1 wine And consuming w2 wine Since it is consuming more than it is producing it is importing w1w2= IMPORTS So from point (b1, w1) = x and (b2,w2)= m If x= 100 and m = 400 The terms of trade = 400 wine for 100 beer= 400/100 = 4 Therefore the terms of trade is the slope = 4 m2+x2= TT2 400 sq + 100 sq= TT 2 Terms of trade = 4 Also known as trade triangle Trade makes everyone better off through redistribution Winner and losers of the HO Model Derived demand the demand for an input like labour depends on the demand for the output that input is producing. Ex. if the demand for cars goes up, the demand for steel and all other inputs will also go up. Ex 2 usa under Autarky Shoes jet planes As we move along the curve towards our comparative advantage the demands for the opposite good go down= Stolper Samuelson theorem Point A = USA under autarky As trade starts, we move to B > we move away from shoes > the demand for shoes go down >shoe worker demand go down > wages of the shoe workers go down. Therefore, the demands for jets go up, demand for jet makers and their wages go up. Jet planes needs skilled labour= if trade opens up with mexico and they want jet planes Skilled labour demand will also go up In US shoes are produced by unskilled labour, mexico produces shoes with their comparative advantage in unskilled labour. Therefore as trade opens up from mexico, demand for low skilled labour in US will go down. The demand for shoes all together won't go down but rather the demand for US made shoes will. 9.15.16 From the position of mexico: Demand for shoes by their own workers goes up, demand for shoe workers increases. However, demand for mexican made jet planes go down, and therefore their demand for skilled labour also goes down and wages decrease. So as low skilled labour in american wages go down= low skilled labour wages in mexico will up and the wages will converge This is called factor price equalization. Specific Factors Model Ex. We have two products to produce computers= f(harware, labour) Shoes= f(machines, labour) We are going to assume that hardware can only be used to make computers, and therefore it is specific to the computer industry and machines can only be used to make shoes. Therefore they are specific factor as well. Labour, on the other hand, can be used in both shoes and computers and so this is a varied factor. So if USA makes computers, with trade the demand for computers will go up. D lc= demand for labour making computers D c= demand for computers P c= Price of computers Dc (up) > Pc (up) > Dlc (up) but this is their nominal wage In the shoes industry Ds (down) > Ps(down) > Dls (down) and their nominal wage might have gone down as well What happens to the owners of the hardware and what happens to labour in terms of their earnings? > Welfares of owners of machines= go down >owners of hardware= are better off >Labour= ? we don’t know because in order to determine if labour is better or worse of, it depends on spending pattern and purchasing power. The purchasing power of the input variable would tell us if they are better or worse off. As a result of trade 3 groups of people are affected. The Leontief Paradox If we rank by K/L = capital labour ratio *Won’t be accurate because US has high skilled labour comparatively but not low skilled labour. *If it is a high capital labour ratio that means it is capital intensive Trade AND Migration Supply push factors= factors that would encourage labour force to leave one's country. Ex genocide, disease, poverty Demand Pull Factors= Factors that would attract people into coming to a country Ex. employment, security, education, familial ties, social networks When people migrate, do people they compete with natives or do they do jobs natives refuse to do? Or do they compliment natives? migrants come in and work in industries that make nontradable goods or sectors where the US does not have a comparative advantage. What is the impact of trade on employment in US It does not have an impact of the # of jobs in the USA but it changes the distribution of jobs in the US What lead to the decline in the manufacturing industry in the us? Technology and innovation which shifted the US job demands
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