Advanced International Trade Theory and Policy
Advanced International Trade Theory and Policy ECON 433
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Date Created: 11/01/15
Advanced International Trade Lecture 15 Prof Tybout October 24 2006 Lecture outline The HeckscherOhlin model with exible technologies The HeckscherOhlin theorem The Factor Content of Trade Relevant reading Caves Frankel and Jones chapter 6 including the Appendix Note Second problem set is posted and due today Oct 24 Edgeworth box and PPFs How do factor stocks determine the shape of the PPF an increase in id that Lisee her good 1 prices can EL Fiae Rybczynski theorem Ho 39 i of one iaclor increases ctor intensively and reducee production ofthe Edgeworth box and PPFs Expansion ofthe labor force holding factor prices fixed WW Edgeworth box and PPFs As the labor force expands the PPF shifts outward dis proportionater for the labor intensive good Edgeworth box and PPFs Proportionate increases in K and L lead to proportionate increases in output of both goods Hence countries with the same KL ratio have PPFs that are identical in shape Edgeworth box and PPFs Proportionate expansion of both factors holding factor prices fixed 0 9 Oy I K 1 Ill Ox L M 7 Edgeworth box and PPFs Q y Countries of different sizes with the same KL ratio have PPFs with the same shape Edgeworth box and PPFs Combining this fact with the Qy Rybczynski theorem it follows that countries with higher KL ratios have steeper PPFs along any ray from the origin High KL country Low KL country Autarky equilibrium in the HO model Assume KL is higher in the home blue country and Y is more capitalintensive than X Then in autarky the relative price ofX is higher at home foreign production and home production and ion consumption Trading equilibrium in the HO model Opening to trade drives the relative price ofX home and drives it down abroad Ratio of Y to X consumption in both countries Hom production Foreign production Trading equilibrium in the HO model Because the relative price of Xfalls at home home producers shift away from Xand toward Y production Consumers shift away from Y and toward X production Or put differently home will export Y and foreign will export X How does trade affect factor prices remember StolperSamuelson All of this traces simply to differences in factor endowments Trading equilibrium in the HO model What kind of country makes a good trading partner Try the HeckscherOhlin game 0 h nu hfml The HO Theorem If Yproduction uses capital relatively intensively and that X production uses L relatively intensively the country with the higher KL ratio will export Yand the country with the lower KL ratio will export X Does the HO model work If all countries produced 2 goods with 2 factors it would be possible to test the predictive power ofthe HO model just by checking trade patterns But with many goods and factors we need to restate the theorem in a more general way The factor content theorem For example if a country has more than its proportionate share of the world s labor its exports will embody more laborthan its imports The factor content theorem Intuition The country with lots of capital per worker produces relatively more capitalintensive goods Likewise the country with little capital per worker produces relatively more laborintensive goods The proportions in which consumers want to consume goods are the same everywhere so each country must export the good it produces in relative abundance Factor content of production K 7 factor price equalization holds the same factor price ratio wr prevails in all countries Qx Thus the factor content of one unit of good Xwill be aIX akx in all countries and the factor content of one unit akX of Ywill be aw aky in all lopewr countries a1 a1 Actual factor content of trade Example Calculating the factor content of an export bundle Given the table below suppose a country exports 2 units of X and 3 units of Y What is the factor content of its exports Per unit X Per unit Y Labor content aIX 15 aly 10 Capital content akx 20 aky 30 Factor content predictions The HO model actually makes a precise quantitative prediction about the factor content of trade when factor price equalization holds Factor content predictions Key observations Since all consumers face the same goods prices they consume X and Y in the same proportions everywhere Thus ifthe conditions ofthe factor price equalization theorem hold people everywhere in the world implicitly consume capital and labor in the same proportion This must match the proportion in which capital and labor are available KWLW Factor content predictions Define LW Z L global stock of labor J KW ZKJ global stock of capital J wL rK SJ 2WL rK country s share in global income 1 z 2 Then implicit consumption of labor and capital by residents of country must be CU stW CKjquW Factor content predictions Finally the factor content of countryquots production is simply its endowment Let TL be countryquots net exports of labor and TN be country j s net exports of capital Then the factor content theorem says W TLJ L st W TKJ K sK Punch line each country must be a net exporter of any factor that it has a disproportionate share of Likewise each country must be a net importer of any factor that it has a less than proportionate share of Testing the factor content theorem Does the HO model do a good job of predicting the factor content of trade flows There is a tendency for countries to be net exporters oftheir abundant factors But the volume oftrade in factors is far less than predicted The case ofthe missing trade This implies there are strong home biases in consumption patterns Testing the factor content theorem Using data from 33 countries Dan Trefler 1993 looked at the relationship between predicted and actual factor contents for 9 Capital Labor endowment in professionaltechnical Labor endowment in clerical Labor endowment in sales Labor endowment in service Labor endowment in agriculture Labor endowment in production Cropland and Pasture Testing the factor content theorem The scatter plots on the following slides summarize the patterns he found Each dot corresponds to a particular country Predicted values are Tkj s Actual values are the actual factor content of trade flows Actual Production Labor Predicted Actual Service Labor 400E 300E 200E Predicted 100E 200E Actual Sales Labor Predicted Actual Professional and Technical Labor Predicted Actual Agricultural Labor Predicted Actual Clerical labor Predicted Actu al Capital Predicted Actual Pasture Land Predicted Crop Land Actual Predicted Interpretation of findings Qualitatively the HO model seems to work for most factors But it grossly overpredicts the volume of trade Why Trade frictions natural and policyinduced Differences in the productivity of factors in different countries Nonhomothetic tastes No factor price equalization so the factor content of goods consumed depends upon where they were produced Interpreting the findings Generalizing the model in all ofthese dimensions is important By adding them into the model researchers have shown that the essential message ofthe HO comes through more clearly in the data It remains true however that some trade is not driven by factor endowments Interpreting the findings Should the limitations of the HO model invalidate the predictions we have used it for concerning the effects of openness on factor prices It will still be true that iftrade drives down the price ofthe importable good and drives up the price of the exportable good factor prices should adjust as predicted by the Lerner diagram Factor price equalization identical tastes internationally and identical factors across countries aren t necessary for this result