Post on 30-Mar-2015
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Explanations for trade
Classical 2. Opportunity costs 3. Comparative advantage
Neo-classical 4. Production structure 5. Factor prices 6. Production volume 7. Factor abundance
1. The world economy
New trade 9. Imperfect competition 10. Intra-industry trade
Policy
8. Trade policy
11. Strategic trade policy
12. Int. trade organizations 13. Economic integration
17. Applied trade policy modeling
Economicgeography
New interactions 14. Geographical economics 15. Multinationals 16. New goods, growth, and development
Industrialorganization
Internationalbusiness
Growth theory
Part
IP
art
IIPa
rt I
IIPa
rt I
V
18. Concluding remarks
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
IntroductionInternational Trade & the World Economy; Charles van Marrewijk
Objectives / key terms
Factor price equalization Stolper-Samuelson
Unit value isoquant / iso-cost line Lerner diagram
Magnification effect Globalization debate
Harry Johnson (1923-1977)
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Factor price equalization (FPE) International Trade & the World Economy; Charles van Marrewijk
In a neo-classical framework with 2 final goods and 2 factors of production, there is a one-to-one correspondence between the prices of the final goods and the prices of the factors of production, provided both goods are produced. This implies:• factor rewards known derive prices of final goods • prices of final goods known derive factor rewards
CorollaryIn a neo-classical framework with 2 countries, 2 final goods, and 2 factors of production, international trade of the final goods, which equalizes the prices of these goods in the two nations, also leads to an equalization of the rewards of the factors of production in the two nations, provided both final goods are produced in both nations and the state of technology in the two nations is the same.
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
labor
capital
0
mpM /1
fpF /1
A
B
r/1
w/1
r
w
m
m
1
r
w
f
f
1
Unit valuecost line
Unit value isoquant Manufactures
Unit value isoquant Food
The Lerner diagram International Trade & the World Economy; Charles van Marrewijk
1 wLrKUnit value isocost line:
1;1 FpMp fm
Unit value isoquants:
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Knowing the prices of inputs w and r gives the unit cost line
There is only isoquant for good M which touches it
L
K
1/r
1/w
M = 1/pm
B
F = 1/pf
C
This determines the price pm
Similarly, there is only isoquant for good F which touches the isocost line; this determines the price pf
one
exactly
one
exactly
From factor prices to final goods prices International Trade & the World Economy; Charles van Marrewijk
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Given the prices of final goods pm and pf the unit value isoquants are determined exactly. They are drawn here in the figure
L
KM = 1/pm
F = 1/pf
There is only isocost line which touches these two isoquants
1/r
1/w
B
C
This determines the values 1/r and 1/w
This implies that if trade between two countries equalizes the prices of final goods and these two countries have identical CRS production functions, then the reward to factors of production w and r are also equalized (FPE)
one
exactly
From final goods prices to factor prices International Trade & the World Economy; Charles van Marrewijk
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Stolper - Samuelson International Trade & the World Economy; Charles van Marrewijk
Stolper - Samuelson propositionIn a neo-classical framework with 2 final goods (both produced) and 2 factors of production, an increase in the price of a final good • increases the factor price of the input used intensively in the production of that good, and • reduces the factor price of the other input.
So if e.g. the production of manufactures is capital intensive and the price of manufactures rises:• the rental rate rises and the wage rate falls.
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Graphical analysis International Trade & the World Economy; Charles van Marrewijk
labor
capital
0
0/1 mpM
fpF /1
A
B
0/1 r
0/1 w
A’
B’1/1 mpM
1/1 r
1/1 w
An increase in the price of manufactures increases the rental rate and reduces the wage rate
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
The magnification effect International Trade & the World Economy; Charles van Marrewijk
Jones magnification effectIn a neo-classical framework with 2 final goods, manufactures M and food F, and 2 factors of production, capital K and labor L, with factor rewards r and w, respectively, changes in the final goods prices are magnified in the factor rewards. If we denote relative changes by ~ and assume that the production of manufactures is relatively capital intensive, the following relationships hold:
• if then
• if then
fm pp ~~
fm pp ~~
wppr fm~~~~
wppr fm~~~~
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Application: globalization, low wages, and unemployment International Trade & the World Economy; Charles van Marrewijk
United States
40
90
140
190
240
290
340
1976 1986 1996
0
2000
4000
6000
8000
10000
12000
14000
Wage white-collar Wage blue-collar Imports low-wage countries
The Stolper-Samuelson result was at the center of the ‘globalization’ debate; rising wage inequality in USA, rising unemployment in EU
Application: globalization, low wages, and unemployment International Trade & the World Economy; Charles van Marrewijk
Argument: rising imports from low-wage unskilled-labor countries reduces unskilled-labor intensive final goods price, thus reducing wage rate for unskilled workers (USA) or increasing unemployment (EU)
France
0
1000
2000
3000
1960 1970 1980 1990
Imports from low -w age countries Unemployment
Introduction
Factor price equalization
The Lerner diagram
From factor prices to final goods prices
From final goods prices to factor prices
Stolper - Samuelson
Graphical analysis
The magnification effect
Application: globalization, low wages, and unemployment
Conclusions
CHAPTER 5; FACTOR PRICESInternational Trade & the World Economy; Charles van Marrewijk
Conclusions International Trade & the World Economy; Charles van Marrewijk
In the neo-classical model:
• one-to-one correspondence between final goods prices and factor rewards
• free trade same final goods prices same factor rewards (FPE)
• price increase of a final good raises reward to input used intensively in the production of that good, reduces reward to other input (St-Sa)
• changes of final goods prices magnified in factor prices (Jones magnification)
• application in globalization debate
• natural-resource intensive manufacturing exports haphazardly spread across the globe
ConclusionsInternational Trade & the World Economy; Charles van Marrewijk
Natural-resource intensive man.; share of exports (%), 1998; Source: ITC
natural-res. int. man.share of exports (%)
14.6 to 77.1 (29)6.7 to 14.6 (31)3.5 to 6.7 (29)1.6 to 3.5 (30)0 to 1.6 (32)