ECON 3HH3 Chapter Notes - Chapter 4: Real Wages, Weighted Arithmetic Mean, Factor Endowment

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11 Oct 2017

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Long-run model where all factors of production (capital and land) can move freely between industries. Reversal of factor intensities: the idea that at different relative wages, a country can be more labour-intensive or capital-intensive. In l/k comparison, since shoes have a high ratio, it is more right than the curve for computers; shoes will always be more further right. Drawn concave depends on endowment: will have a higher intercept on the good that uses the fop: the more fop allows for greater quantity of that good that is intensive for it, thus higher intercept. Assume that taste and preferences are the same in both countries, so indifference curve shapes are the same. Slope of indifference curve = relative price of good x in terms of good y = px/py. Relative prices are a reflection of a country"s abundance and intensity of fop. Home: capital abundant, and since computers is capital intensive, will have a higher x-intercept than shoes.

Related Questions

Suppose that two countries in a two-country-two-factor-two-commodity model have identical and homothetic tastes, have identical endowments of labor and have the same technology in the capital-intensive industry. However the foreign country has a larger endowment of capital than the home country and has a Hicks-neutral technological advantage over the home country in the production of the labor-intensive commodity, product 1. [Hint: A Hicks-neutral technological advantage shifts the isoquants up without changing their shape and thus marginal rate of substitution along any ray from the origin, i.e., Î»X1 = Î»f(K,L) where Î» is the degree of the technological change in product 1.]

(i) What is the pattern of trade between the two countries if we also know that, in autarky, the wage-rental ratio is higher in the foreign country than it is in the home country? Explain as carefully as you can each step of your reasoning. In order to solve this problem, break down the problem in two sub-questions, (i) what happens if there is no technological difference and differences only with respect to endowments, and (ii) what happens if there is no difference in endowments and the only difference is about technology.

1. The Heckscher Ohlin model Home and Foreign have twoproduction factors, skilled and unskilled labor and produce twogoods, textiles and computers. Home is skilled labor abundant,and computers are skilled labor intensive. Starting from asituation of autarky, the two countries liberalize trade. Assumingthat the two countries produce both goods before and after tradeliberalization, answer the following questions:

(a) What is the effect of trade liberalization on the relativeprice of com- puters at Home and in Foreign?
(b) What is the effect of trade liberalization on the output ofcomputers and textiles at Home and in Foreign?
(c) What is the effect of trade liberalization on aggregatewelfare in the two countries?
(d) What is the effect of trade liberalization on the realfactor returns in Home and Foreign? Please provide a graphicalexplanation for your argument. What is the name of this famousresult?

2. The Heckscher-Ohlin model Recently, computer programmers indevel- oping countries like India have begun doing some workformerly done in the United States. This shift has undoubtedly ledto substantial pay cuts for some programmers in the United States.Answer the following two questions:

(a) How is it possible, when the wages of skilled labor arerising in the United States as a whole?
(b) What argument would trade economists make against seeingthese wage cuts as a reason to block outsourcing of computerprogramming?

3. The Heckscher-Ohlin model This question asks you to reviewsome of the empirical tests of the Heckscher-Ohlin model.

(a) Explain how the Leontief Paradox and the more recent resultsby Bowen, Leamer and Sweikauskas discussed in class and in thetextbook contradict the predictions of the Heckscher Ohlinmodel.

(b) In the discussion of empirical results on the HeckscherOhlin model, we noted that recent work suggests that the efficiencyof production factors differ across countries. Explain how thiswould affect the concept of factor price equalization.

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ECON 3HH3 Chapter Notes - Chapter 4: Real Wages, Weighted Arithmetic Mean, Factor Endowment

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