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ECON 503 Week 6 Notes

by: Tulsi

ECON 503 Week 6 Notes ECON 503 001

GPA 3.954

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About this Document

international trade economics econ 503 hauk
International Trade Economics
William Hauk
Class Notes
International, trade, Economics
25 ?




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This 3 page Class Notes was uploaded by Tulsi on Saturday October 1, 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 3 views. For similar materials see International Trade Economics in Economics at University of South Carolina.


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Date Created: 10/01/16
Week 6 Tuesday,September27, 20161:18 PM Going over question 3 frommidterm 3) Assume that a country produces2 goods: computers (capital intensive) and shoes (labor intensive). Country is capital abundant. a) Country opens up to trade, what will happen to country'stotal production of shoes and computers i. Computer production increases and shoe production decreases b) What will happen to capital-labor ratio in computer and shoe industry? i. Total demand for capital increases ii. r/w increases in both industries iii. Kc/Lc decreases b/c capital has become relatively more expensive iv. Ks/Lsalso decreases c) Who in the country will be opposed to trade-liberalization? i. Workers d) Who is in favor of trade liberalization? i. Capital owners Short run immigration impact -Specific Factors Model -real wages fell -return on Specific Factors increased -production of both goods increased Long run immigration impact -Hecksher Ohlin Model with box diagram -real wages did not change -return on capital did not change -labor intensive industry grows -capital intensive industry shrinks (Rybczynksi Theorem) Short Run Impact of FDI -specific factors model -increase capital stock in industry that uses capital as specific factor -increase MPLm -wage increases in both real and nominal terms (which means MPLm increased) -Lm increases -La decreases -becauseLa fell and there are less workers,land is less productive,so MPN decreases -return on Land falls in real and nominal terms -becauseMPLm increased, Km/Lm increased -becauseKm/Lm increased, Lm/Km decreased -for each unit of capital, there are fewer workers using it -thereforeMPKm decreased Week 6 Page 1 -becauseKm/Lm increased, Lm/Km decreased -for each unit of capital, there are fewerworkers using it -thereforeMPKm decreased -r decreases K Long Run Impact of FDI -H-O model -increased total capital supply using FDI -Kcincreased, Lc increased Ks/Ls < Kc/Lc -Kc/Lcstays the same So, shoe is labor intensive industry -Ksdecreased, Ls decreased -Ks/Lsstays the same -real wages stay the same World Labor Market -returnson capital stay the same -quantity of computer production increased -shoeproduction decreased -aka rybczynskitheorem Responseto scrappingimmigrationrestrictions: Developedcountry: -native workerswould lose "B" -capitalownerswould gain "A+B" -net effectis gain of "A" Developingcountry: -wages wouldrise -workerswouldgain "C+D+E" -capitalownerslose "C+D" -net effectis gain of "E" TotalWorld Effect: -gain of "A+E" Monopoly 9/29/30 P> AC, firm stays in business Week 6 Page 2 Monopoly 9/29/30 P> AC, firm stays in business P<AC, firm exits Adam Smith (1776) Why Trade is Beneficial 1) Absolute advantage 2) Increasing returns to scale 3) Consumerscan get a greater variety of goods Monopolistic Competition Model P = a - bQ a = vertical intercept b = slope of demand curve 2 Total revenue= P*Q = aQ -bQ MR = dTR/dQ = a-2bQ FC = constant MC = AC = TC/Q Different firms producinga differentiated good Each firm has a monopoly over its particular variety Close substitutes but not perfect Many firms in industry Firms producewith increasing returns to scale on technology (AC is declining) In short run,# of firms doesnot change, but in long run,firms can freely enter and exit market When firms enter the market and produceown variety of the good,two things happen: Each firm's share of the market gets smaller as more firms enter Firm specific demand curvesshift left Individual firm demand curvesbecome more elastic (flatter) when closer substitutes are available Week 6 Page 3


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