A country that is relatively labor abundant will will have a comparative advantage in the production of labor intensive goods and a capital abundant country ...
A diagram with autarky
E13Ch3EndNoTrade
Look at the comparative advantages!
Who will trade what?
A diagram with different factor endowments and trade:
E13Ch3EndowTrade
Do the trade patterns support Heckscher-Olin?
Heckscher-Olin in the real world? Pretty much.
Leontief? 1954 with data and methodological issues.
More recent tests with human capital included supports H-O
Factor Price Equalization
There are redistributive effects of international trade
Between countries - both countries are wealthier
Within countries - free trade tends to equalize factor prices within a country
There is a theorem for this also - the factor price equalization theorem
Assuming:
Free trade
Different factor endowments
Factors cannot move freely between countries(?)
The adjustment process
Start with autarky - imagine the prices of two goods and accompanying resource prices
We should remember that there is a market for each kind of resource and the price of a resource is determined by its supply (availability and the costs of making it available), and its demand. The demand for a factor of production is determined by its marginal productivity.
Next, permit trade. What happens to the prices of the two goods and the resources that produce these goods?
The price of the good that the plentiful resource produces rises. The MP of the plentiful resource rises causing the price of that resource to rise.
The price of the good that the scarce resource produces falls with free trade. The MP of that resource decreases as does its price.
Resource prices tend to equalize.
How about a diagram!
E13Ch3FactorPEq
Beautiful, or what?
Distribution Effects of Factor Price Equalization
The earnings of which factor of production will rise with free trade?
Which will fall?
The Stolper-Samuelson Theorem - free trade raises the earnings of the abundant factor and decreases the less abundant.
The magnification principle - the change in the price of the factor will be greater than the change in the price of the good.
There will be winners and losers within a country.
There will be political supporters and detractors.
In the Real World
Communication and transportation costs have decreased greatly. This allows,
The value chain is complex and often long.
Follow the links in the chain
One country will have a comp ad in one link of the chain and another country in a different link.
Design, marketing, manufacturing, accounting , customer service, finance, etc.
Value added
Produce where you have a comparative advantage and outsource when you don't.
The internationalization of the production process
changing market conditions produce changes in comparative advantage - kaleidoscopic comparative advantage.
Economic Growth and International Trade
Economic growth is...
It is caused by:
New or better resources
Better technology - resource saving.
When the growth occurs in the production of one good -
The PPF shifts...
Growth increases the production of the good that uses the growing factor more intensively - Rybczynski Theorem
Depending which good increases:
the trade could be pro-trade if the increase is in the good that is exported or,
