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Advanced International Trade Theory and Policy

by: Miss Romaine Grimes

Advanced International Trade Theory and Policy ECON 433

Marketplace > Pennsylvania State University > Economcs > ECON 433 > Advanced International Trade Theory and Policy
Miss Romaine Grimes
Penn State
GPA 3.64


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This 0 page Class Notes was uploaded by Miss Romaine Grimes on Sunday November 1, 2015. The Class Notes belongs to ECON 433 at Pennsylvania State University taught by Staff in Fall. Since its upload, it has received 18 views. For similar materials see /class/233104/econ-433-pennsylvania-state-university in Economcs at Pennsylvania State University.


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Date Created: 11/01/15
Advanced International Trade Lecture 8 Prof Tybout September 28 2006 Lecture outline Outsourcing a preliminary look Speci c factors model The HeckscherOhlin model producer behavior Relevant reading Caves Frankel and Jones chapter 5 Note First exam is Thursday October 5 Review session 5 PM Monday Oct 1 111 Chambers A copy of the textbook is now on reserve Outsourcing A Preliminary Look I I I I l L home L home L outsourced Outsourcing A Preliminary Look Ifwe think of capital as really being human capital does this constitute an explanation for the growing wage gap Perhaps in Germany The numbers are too small for the US no more than 100000 workers per year largely from India and Philippines compared to 57 million jobs in the US Many of the foreign workers that the US is using are not low skilled Migrant worker effects on farm profits may be more important Outsourcing A Preliminary Look Stepped up border enforcement kept many illegal Mexican migrant workers out of California this year farmers and labor contractors said putting new strains on the state s shrinking seasonal farm labor force As they sum up this season s losses estimated to be at least 10 million for California pear farmers alone growers in the state mainly blame Republican lawmakers in Washington for stalling immigration legislation that would have addressed the shortage by authorizing a guestworker program for agriculture The New York Times Julia Preston September 22 2006 The specific factors model Now consider analvzinq an entire economv multiple goods and factors some factors are stuck with particular types of production in the short run others are free to migrate across sectors Good way to characterize Short run reactions Cases where some factors eg land are basically good forjust one type of production The specific factors model Assume 2 goods XY produced with neoclassical technologies Agriculture X uses land IV and labor LX Industry Y uses capital K and labor Ly Total laborforce is divided between the two sectors L LX Ly perfect competition consumers have identical homothetic tastes The specific factors model My K slope Px y X The specific factors model Effects of trade given a comparative advantage in Y on the specific factors LMP1 rises as labor moves into the industrial Y sector Py rises relative to PX so the return on capital rises even more with respect to agricultural goods The return on land must fall relative to prices of both goods Show as an exercise The general result An increase in the relative price of one good benefits the factor specific to that good and hurts the factor specific to the other good The specific factors model Effects of trade given a comparative advantage in Y on the mobile factor As labor moves out oinnto Y the wage in terms of the former rises while the wage in terms of the latter falls 1MPLX 1MPLY PX PY So the effects on worker wellbeing are ambiguous The general result A change in relative output prices has an ambiguous effect on the mobile factor The specific factors model Effects of trade given a comparative advantage in Y on the specific factors An increase in the relative price of one good benefits the factor specific to that good and hurts the factor specific to the other good Effects of trade given a comparative advantage in Y on the mobile factor A change in relative output prices has an ambiguous effect on the mobile factor The specific factors model An alternative representation of equilibrium w VJlIPX VMPY The specific factors model A tradeinduced change in the price of Y or a change in the supply of capital The specific factors model Suppose the supply of a mobile factor grows eg because of outsourcing w VJVIPX MPY A C W i a b c OX Y Wages fall to w for the domestic programmers owners of the specific factors gain in Xsector gehf economywide GDP is improved by def What does adef represent befc The HeckscherOhlin Model Assumes neoclassical production technologies for a given product the same everywhere Assumes multiple factors go into the production of each good Assumes factors are perfectly mobile across sectors within a country Focuses on the relationship between trade and factor endowments The HeckscherOhlin Model A More on production functions lsoguants Given our assumptions about production technologies reductions in one factor input can always be offset by increases in the other K The HeckscherOhlin Model lsoguants continued Diminishing returns and complementarities bewteen capital and labor ensure that isoquants are convex toward the origin The slope of an isoquant at any particular point is called its Marginal Rate of Technical Substitution MRTS at that point dXMPL39dLMPK39dK dK MPL MRTS EM 0 3 dL MPK The HeckscherOhlin Model Constant returns to scale scaling all inputs by some positive factor A results in a proportionate adjustment in output Thus if X0 FK0 L0 AXO FOLKO ALO The Heckscher Ohlin Model Homogeneity of degree h Scaling all inputs by some positive factor A results in an increase in output by the factor Ah Thus if X0 FKo Lo MO 0 FLK0 ALO h gt 1 increasing returns to scale h lt 1 decreasing returns to scale All homogeneous production functions imp isoquants with a constant slope MRTS along any ray from the origin The HeckscherOhlin Model Isoquants for a homogeneous production technology The HeckscherOhlin Model B Profit Maximization lsocost line Gives all possible bundles of factor inputs that can be purchased for a given cost C C w39L r39K or K Cr wrL W1 Firms minimize the cost of producing at output level X0 by choosing the K L combination on the X0 isoquant that is on the lowest C closest to the origin isocost line 21 The HeckscherOhlin Model K C 3r Qu C 2r At the costminimizing point C1 W L MRTS r MPK CI w C2w CEw The HeckscherOhlin Model lm cations of constant returns to scale All rms that share the same production technology and face the same factor price ratio wr choose the same factor intensity KL regardless of how much they are producing Given that all firms share the same factor intensity and given constant returns it doesn t matter how rms divide up total production among themselves The same total output will be produced The HeckscherOhlin Model WM shows all combinations of factor inputs that will produce 1 worth of a given good K PQ1orQ1P L1 lw The HeckscherOhlin Model Properties of unit revenue isoquants Given perfect competition and positive production levels they are tangent to the 1 isocost line For a given factor price ratio they can be used to determine how much of each factor input goes into 1 worth of output The HeckscherOhlin Model B Trade and factor prices in the HO model A small open economy producing a single qood K Q1PW El 5 K1 L L lw 26 The Heckscher Ohlin Model A small open economy producing a single qood The economy s factor endowment determines the factor intensity of each producer Factor intensities determine marketclearing factor prices higher KL leads to higher wr Factor intensities in combination with endowments determine how much ofthe good is produced The world price of the good determines the level of w and r The Heckscher Ohlin Model lfP 2 the economy is endowed with KI 2030 and producing 1 worth of output requires K1L123 How many units of output can the economy produce What is the value of production Ifthe cost of capital is r 020 what is the wage rate Ifthe world price increases what will change in the new equilibrium Factor prices Factor price ratios Output levels Real income


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