chapter 7 Factor abundance
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Transcript chapter 7 Factor abundance
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Introduction
Objectives / key terms
Heckscher-Ohlin result
Homothetic demand
Rybczynski lines
Marginal rate of substitution (MRS)
Marginal rate of transformation (MRT)
Leontief paradox
Autarky
International trade
General equilibrium
Missing trade
Bertil Ohlin (1899-1979)
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Heckscher - Ohlin
Heckscher-Ohlin proposition
In a neo-classical framework with 2 final goods, 2 factors of
production, and 2 countries which have identical homothetic tastes, a
country will export the good which intensively uses the relatively
abundant factor of production.
If the production of manufactures is capital intensive and Austria is
capital abundant, Austria will export manufactures and import food.
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Demand
All previous neo-classical results depend only on the supply side,
since
we have to
exports production consumption
specify the demand side to make conclusions about trade flows.
m
Maximizing the utility function U Cm C
1 m
f
;
0 m 1
subject to a standard budget contraint implies that consumers will
spent a fraction m of their income on manufactures (quite
similar to cost minimization problem for producers)
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
The production possibility frontier
With crs and 2
factors of
production the
ppf is concave
to the origin
6
5
Food
4
3
2
1
0
0
1
2
3
Manufactures
4
5
6
International Trade & the World Economy; Charles van Marrewijk
The production possibility frontier
6
5
Food
4
m 0.9
3
The curvature of the
ppf depends on the
difference in capital
intensity for the
production of food
and manufactures
m 0.3
2
m 0.7
1
0
0
1
2
3
Manufactures
4
5
6
International Trade & the World Economy; Charles van Marrewijk
The production possibility frontier
Increase in capital stock leads
to outward shift of ppf biased
in the direction of capital
intensive manufactures;
tangency points at constant
prices is straight line (Ryb)
6
5
Food
4
A
3
capital
B
Rybczynksi
line
2
C
1
K=2
K=5
K=8
0
0
1
2
3
4
Manufactures
5
6
7
8
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Structure of the equilibrium
delivery of manufactures
Capital
owners
(spending m on manufactures)
capital services
(rental income)
Production of
Manufactures
consumers
Laborers
delivery of food
Production
of Food
labor services
(wage income)
(spending 1-m on food)
direction of goods flows
(direction of money flows)
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Autarky
equilibrium
6
(slope
= pm/pf )
income
line
welfare
(slope = MRS)
5
Food
4
3
autarky
production
autarky
consumption
2
ppf
(slope = MRT)
1
0
0
1
2
3
Manufactures
4
5
6
International Trade & the World Economy; Charles van Marrewijk
Autarky 7
equilibrium
Capital abundant
A produces
relatively more
capital intensive
manufactures at
relatively lower
price
UB
6
ppfB
5
Food
4
autarkyB
3
autarkyA
2
Autarky in
2 countries
(A and B)
UA
1
ppfA
0
0
1
2
3
4
Manufactures
5
6
7
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
International
trade
equilibrium
For A price of
manufactures rises: capital
abundant A produces even
more capital intensive
manufactures and exports
these in exchange for food
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Application: the Summers-Heston data
Hypothetical production/worker in autarky using Summers-Heston data
b. hypothetical autarky production per worker
food
1
Austria
Norway
Bolivia
Zambia
0
0
1
manufactures
2
3
International Trade & the World Economy; Charles van Marrewijk
Application: the Summers-Heston data
Hypothetical production/worker in free trade w. Summers-Heston data
hypothetical production per worker with trade
1
consumption expansion path
Austria consumption point
Bolivia
food
Zambia
Austria income line
Austria production
Norway
0
0
1
2
manufactures
3
4
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
The case of the missing trade
First important empirical study (1956) leads to ‘Leontief paradox’:
supposedly capital abundant USA imports capital intensive goods?
Possible explanations: demand bias, factor-intensity reversal,
restrictiveness of 22 2 framework.
Later studies, e.g. Bowen, Leamer, and Sveikauskas (1987), analyze
more goods, more factors, more countries, as did Trefler (1995) who
• finds modest support for neo-classical trade model (about 71%)
• shows that factor service trade is smaller than factor endowments
prediction (case of missing trade)
• support increases if technological differences (part I of the book)
are taken into consideration (to about 78%)
• support increases if domestic demand bias is taken into
consideration (to about 87%)
• with neo-classical model, different technology, and demand bias
about 93% of international trade flows can be explained.
International Trade & the World Economy; Charles van Marrewijk
CHAPTER 7; FACTOR ABUNDANCE
Introduction
Heckscher - Ohlin
Demand
The production possibility frontier
Structure of the equilibrium
Autarky equilibrium
International trade equilibrium
Application: the Summers-Heston data
The case of the missing trade
Conclusions
International Trade & the World Economy; Charles van Marrewijk
Conclusions
Neo-classical model:
• assumes identical homothetic preferences; neutralize demand effects
• countries with high capital-labor ratio have high wage-rental ratio in
autarky and low relative price of capital intensive good
• free trade equalizes final goods prices (and thus factor prices; FPE)
• capital abundant country exports capital intensive good (HOS)
• free trade increases production, global efficiency, and welfare
• extended version of the model performs reasonably well empirically
• technology intensive manufacturing exports mainly in OECD
countries (next slide)
International Trade & the World Economy; Charles van Marrewijk
Conclusions
Technology intensive man.; share of exports (%), 1998; Source: ITC
technology int. man.
share of exports (%)
25.2 to 76.4
12.4 to 25.2
4.3 to 12.4
1.7 to 4.3
0 to 1.7
(30)
(31)
(29)
(28)
(33)