Chapter 4 Notes

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University of Toronto Scarborough
Economics for Management Studies
Garth Frazer

Chapter 4 Resources Comparative Advantage and Income Distribution NotesSummary1To understand the role of resources in trade we develop a model in which two goods are produced using two factors of production The two goods differ in their factor intensity that is at any given wagerental ratio production of one of the goods will use a higher ratio of land to labour than production of the other2As long as a country produces both goods there is a onetoone relationship between the relative prices of goods and the relative prices of factors used to produce the goods A rise in the relative price of the labourintensive good will shift the distribution of income in favour of labour and will do so very strongly The real wage of labour will rise in terms of both goods while the real income of landowners will fall in terms of both goods3An increase in the supply of one factor of production expands production possibilities but in a strongly biased way At unchanged relative goods prices the output of the good intensive in that factor rises while the output of the other good actually falls4A country that has a large supply of resource relative to its supply of other resources is abundant in that resource A country will tend to produce relatively more of goods that use its abundant resources intensively The result is the basic HeckscherOhlin theory of trade Countries tend to export goods that are intensive in the factors with which they are abundantly supplied5Because changes in relative prices of goods have very strong effects on the relative earnings of resources and because trade changes relative prices international trade has strong income d
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