1.Heckscher - Ohlin proposition
A county will export the good which uses the relatively abundant factor of production relatively intensively.
- eg. China will export labor intensive product since China have relatively abundant labor for this good as compared to the rest of the world.
2. Rybczynski proposition
Given final goods prices, an increase in the endowment of a production factor leads to an increase in the production of the good that uses this factor intensively and a reduction in the other good, see Rybczynski (1955).
- eg. Increasing capital stock increases the production possibility of both goods (manufacturing and food), ie. the production possibility frontier (PPF) shift outwards. Given the final good price (ratio) of the two goods, the increase in production of the capital intensive good will increase while the production of the labor intensive good will decrease.
3. Stolper - Samuelson Theorem:
In the long run, when all factors are mobile, an increase in the relative price of a final good will increase the real earning of the factor used intensively in the production of that good and decrease the real earning of the other factor.
In the long run, when all factors are mobile, an increase in the relative price of a final good will increase the real earning of the factor used intensively in the production of that good and decrease the real earning of the other factor.
- eg. For two countries where the original final price (ratio) is different, if the free trade price ratio falls in between the two prices (Pma/Pfa > Pm/Pf > Pmb/Pfb), for country a, the relative price of the manufacturing good is cheaper in free trade, and the price of food is higher and country a will therefore produce more food, in which the country is relatively more endowed with labor, the factor of production for food.
- Consequently, country b start to produce more manufacturing goods than in autarky. However, the rise in the relative price of manufacturing goods in country b leads to a rise in the rental price and a fall in wage rate, since the production of more manufacturing goods increases the demand for capital and therefore raises the rental prices; while the rental rate fall in country a.
- In both countries, the relatively abundant factor of production gains from international trade and the relatively scarce factor of production loses form international trade.
4. Factor price equalization theorem --Samuelson
Suppose two countries are engage in free trade, having identical technologies but different factor endowment. If both countries produce both goods and factor intensity reversal (FIR) do not occur, then the factor prices (w,r) are equalized across countries.
- This result do not occur when there is only one sector in the economy.
- When there are two sectors, the labor abundant country can produce more and export the labor intensive good. In this way, the labor can still be fully employed while paying the same wage as the capital abundant country.
Gain from trade
- when there is differences in technology and endowment.
- Pro-competitive effect, basically reduce the abuse of market power by domestic firms.
- Increase in variety, trade increase the extent of the market and for consumers who enjoy the love of variety, trade is welfare increasing.
- Horizontal intra-industry trade: country simultaneously import and export goods classified in the same sector and at the same stage of processing.
- Vertical intra-industry trade: country trade for product under the same sector category but are goods at different stages of processing. This is mainly made possible with increasing ability to organize fragmentation of the production process into different stages.
- Grubel-Lloyd index (1975): measuring the extend of intra-industry trade
http://en.wikipedia.org/wiki/Grubel%E2%80%93Lloyd_index
- GL<1
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Trade patters in the Ricardian model are determined by comparative advantage, the level of wages across countries is determined by absolute advantage.
References:
§
Acemoglu, D. (2009), Introduction to Modern Economic Growth, Princeton
University Press, Princeton , N.J.
§
Marrewijk, C. van (2011), Macroeconomics: Fundamentals, Dynamics, and
Policy, mimeo, Utrecht University School of Economics
§ Feenstra, R.C. (2004), Advanced International Trade: Theory and Evidence, Princeton University Press.
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