Lecture notes international Economics

Economics 184 International Trade

Topic 4a: Multiple-Cone HO

Spring 2014Peter K. Schott, Yale School of Management & NBER

Administrative

2

Last Time/This Time

• Last time – Specific factors model– Industry vs factor affiliation in trade preferences– How fast do factors adjust in the “real” world

• This Time– Multiple-cone HO model– Applications of multiple-cone HO

3

Motivation

4

2011.5.13

http://www.cartoonistgroup.com/store/add.php?iid=60676


Motivation

5

2011.5.13



Motivation

6

2011.5.13 K

L1/wL

1/wK

Toys

US

CHN

Autos

bA

bC

Do the US and China really produce the

same set of goods?



This Time

Models

• Ricardian Model• Single-Cone HO Model• Ricardo-Viner Model• Multiple-Cone HO Model

• Krugman Model• Krugman-Melitz Model• HO + Krugman-Melitz

9

Issues

Why do countries gain from trade?Does everyone within a country gain?How are gains affected by immobility?How “directly” do countries compete?How does trade evolve with development?What role for product variety in trade?How do firms influence trade?Putting it all together: a unified theory of

trade?

Trade Liberalization in the 2x2x2 HO Model

10

When the US and China begin trading, the relative price of apparel falls in the US, inducing a reallocation of US workers and capital from apparel to chemicals

Evidence of reallocation in the U.S. is not hard to find…(though the amount of it that is due to trade can be hard to identify)

US

QChem

QApp

K

L

USChemicals

Apparel

Reallocation and Trade

11

“3 million more jobs have been lost to cheap overseas labor markets as corporate America campaigns relentlessly for ‘higher productivity,’ ‘efficiency,’ and ‘competitiveness,’ all of which have been revealed to be nothing more than code words for the cheapest possible labor in the world.”

Lou DobbsCongressional Testimony 2007.3.28

http://articles.cnn.com/2007-03-28/us/dobbs.testimony_1_trade-deficit-free-trade-national-debt?_s=PM:US

US Manufacturing Employment,1948-2013

12

2001-4-3 million jobs

Where did these workers go?

www.bls.gov

U.S. GDP Shares

Industry 1970 2006Agriculture 2.6 1.0Mining 1.4 2.0Manufacturing 22.7 11.7Services 73.3 85.3

Finance, Insurance and Real Estate 14.6 20.9Professional 5.4 11.8Health 3.2 6.8Education 0.7 0.9

Other 50.1 45.8Total 100 100

Source: BEA.

13

Similar Changes Are Occurring Across the Developed World

14

Source: Industrial Metamorphisis (Economist 2005.9.29).

http://www.economist.com/node/4462685?story_id=4462685



Just a Cycle?

15

?

www.bls.gov

Just a Cycle?

16

“There are jobs -- let’s have a little straight talk here -- there are some jobs that aren’t coming back to Michigan.

There are some jobs that won’t come back here to South Carolina.

(Etc….)

We need to go to the community colleges and design education and training programs so that these workers get a second chance. That’s our obligation as a nation.”

John McCainOn the campaign trail, 2008

http://www.issues2000.org/2008/John_McCain_Jobs.htm

Just a Cycle?

17

“Over the past several years, the president has failed to call China a currency manipulator,” Romney said at a rally in Shawnee State University in Portsmouth, Ohio.

“Let me tell you, on Day One of my administration I will label China a currency manipulator. We have got to get those jobs back and get trade to be fair.”

Just a Cycle?State of the Union 2013.2.12

Our first priority is making America a magnet for… manufacturing. After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three….

(APPLAUSE)

There are things we can do, right now, to accelerate this trend. Last year, we created our first manufacturing innovation institute in Youngstown, Ohio….

(APPLAUSE)

And I ask this Congress to help create a network of 15 of these hubs and guarantee that the next revolution in manufacturing is made right here in America. We can get that done.

18

http://theweek.com/article/index/240029/state-of-the-union-6-highlights-from-president-obamas-address

Just a Cycle?

19

Questions (Issues)

Theory(Stories)

Data(Evidence)

Who’s Right? How Can We Tell?

back to the model

20

Multiple- vs Single-Cone HO

Multiple-Cone HO

• Two factors of production

• Two countries

• Many industries– FPE within a cone, but different

relative wages across cones

– Countries incompletely specialize in the goods they produce, but do not produce all goods

– Factor accumulation leads to changes in product mix

Single-Cone HO

• Two factors of production

• Two countries

• Two industries– FPE

– Incomplete specialization

21

Remember This Slide?From HO: How Does Comparative Advantage Arise?

Value ($mill)

Quantity (000)

Average Price

($/board)Canada 16.6 427 39Austria 15.1 235 64China 14.5 243 60Spain 5.8 65 89Germany 3.8 54 70France 2.3 20 115Tunisia 1.7 19 89Mexico 1.7 208 8Italy 1.6 32 50Taiwan 0.7 52 14Switzerland 0.7 6 117Bulgaria 0.5 9 53Other 17.6 450 39Total 82.6 1820 45

22

In 2001, the U.S. imported snowboards from 24 countries

Who are the largest exporters?

Why?

U.S. Snowboard Imports, 2001

Source: U.S. Census Bureau.

Remember This Slide?From HO: How Does Comparative Advantage Arise?

Value ($mill)

Quantity (000)

Average Price

($/board)Canada 16.6 427 39Austria 15.1 235 64China 14.5 243 60Spain 5.8 65 89Germany 3.8 54 70France 2.3 20 115Tunisia 1.7 19 89Mexico 1.7 208 8Italy 1.6 32 50Taiwan 0.7 52 14Switzerland 0.7 6 117Bulgaria 0.5 9 53Other 17.6 450 39Total 82.6 1820 45

23

In 2001, the U.S. imported snowboards from 24 countries

Who are the largest exporters?

Why?

U.S. Snowboard Imports, 2001

Source: U.S. Census Bureau.

Multiple-Cone HO with “Special” Prices

• Suppose there are two factors but four goods

• Can you see that if product prices are “just right”, the unit value isoquants all line up on the same isocost curve?

• In that case, the U.S. might produce all four goods, but there will not be a unique equilibrium

• Are there any goods we know the U.S. has to produce?

24

K

Chemicals

bChem

bFoot

bAir

bApp

US

L

Aircraft

Apparel

Footwear

bChem

Multiple-Cone HO with More General (Realistic?) Prices

• In the multiple-cone HO model, each cone defines an area of incomplete specialization

• Countries will produce the two goods anchoring their cone, and have the relative wages associated with that cone– US: aircraft and chemicals– Mexico: chemicals, apparel– China: apparel, footwear

• No FPE unless in same cone!– wL lowest in China!– wL highest in US!

25

K

Apparel

Aircraft

Footwear

Chemicals

bFoot

bAir

bApp

L

US

China

Mexico

1/wLUS 1/wL

Mex 1/wLChn

Remember this SlideFrom HO: Is FPE Realistic?

26

Bertil Ohlin1933

No, it’s “almost unthinkable and certainly highly improbable.”

Remember this SlideFrom HO: Is FPE Realistic?

27

Average Nominal Monthly Wages, 2010PPP Adjusted International Dollars

Source: ILO.

http://www.ilo.org/global/about-the-ilo/newsroom/comment-analysis/WCMS_210933/lang--en/index.htm

28

010

2030

4050

Rea

l Per

Cap

ita G

DP

(US

D 0

00)

0 .2 .4 .6 .8 1Population Share

1980

The Global Labor Pool

Source: Leamer and Schott (2005).

China

US

Mexico

http://hbr.org/2005/04/the-rich-and-poor-keep-getting-richer/ar/1



modelling trade liberalization with multi-cone HO

29

Trade Liberalization in the U.S. in Single-Cone HO

30

US

QChem

QApp

K

L

USChemicals

Apparel

bChem

Trade Liberalization in Multiple-Cone HO

• The U.S. initially produces all four goods

• Trade liberalization lowers the prices of the two most comparative disadvantage industries, Apparel and Footwear

• As a result, Apparel and Footwear can no longer be produced profitably in the U.S.

• The US abandons these industries and reallocate the released factors to Chemicals and Aircraft

• (In China, the reallocation is from Aircraft and Chemicals to Apparel and Footwear) 31

K

Chemicals

bFoot

bAir

bApp

US

L

Aircraft

Apparel

Footwear

China

x x

Capitalism, Socialism and DemocracySchumpeter 1942

• Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary.

• And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers.

• Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems, of which exactly the same thing holds true.

• The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

32

Joseph Schumpeter1883-1950

bChem

Trade Liberalization in Multiple-Cone HO

• Factory return implications?

• None!

• K and L move from Apparel and Footwear to Chemicals and Aircraft, but nominal wages remain as noted by the black isocost line

• Realistic?

• Can you tell a different story?

33

K

Chemicals

bFoot

bAir

bApp

US

L

Aircraft

Apparel

Footwearx x

Trade Liberalization in Multiple-Cone HOFixed Factors Example

• Suppose both K and L are specific to Apparel and Footwear in the US in the short run

• Then reallocation to Aircraft and Chemicals is not possible

• When prices change, returns to both factors in those industries will fall one for one with the price

• Labor and capital “trapped” in Apparel and Footwear see their wages fall, while there is no change in the wages of labor in Aircraft and Chemicals

34

K

Chemicals

bCbC

bAir

bApp

US

1/wL

L

Aircraft

Apparel

Footwear bFoot

1/wLApp 1/wL

Foot

Three different returns each for labor and capital in the US until reallocation occurs

(Note: returns for K not noted on y-axis, but you can see where they would be, right?)

Trade Liberalization in Multiple-Cone HOFixed Factors Example

• Suppose only Labor is specific to Apparel and Footwear in the US in the short run

• Return to capital pinned down by the Aircraft and Chemicals

• The wages of labor “trapped” in Apparel and Footwear fall even more

• What if there are different types of workers…?

35

K

Chemicals

bCbC

bAir

bApp

US

1/wL

L

Aircraft

Apparel

Footwear bFoot

1/wLApp 1/wL

Foot

Human Capital in Multiple-Cone HO

36

Skilled Workers

Apparel

Aircraft

Footwear

Chemicals

Unskilled Workers

US

U.S. Wages by Education Level

37Source: Autor, Katz and Kearny (2007)

The real relative wages of less skilled workers have fallen over time


38Source: Autor, Katz and Kearny (2008).

Aircraft

Apparel

http://economics.mit.edu/files/586




• What policies are suggested by the model?

39

Trade Adjustment Assistance (TAA)

NAFTA-TAA

If imports from Canada or Mexico cost you your job ... apply for NAFTA Transitional Adjustment Assistance

NAFTA-TAA assists workers who lose their jobs or whose hours of work and wages are reduced as a result of trade with, or a shift in production to, Canada or Mexico.

The NAFTA-TAA Program provides a comprehensive, timely array of retraining and reemployment services to all affected workers. The program extends rapid response and basic readjustment services to those who are eligible. Workers in primary firms receive these benefits under the NAFTA-TAA program, however, workers in secondary firms receive assistance under Title I of the Workforce Investment Act.

How is this policy motivated by the model?

40

http://www.doleta.gov/programs/factsht/nafta.cfm

Just a Cycle?White House Planning Job Training Partnership NYT 2010.10.2

“President Obama plans to… retrain workers for jobs that are in demand.”

“The goal is to encourage community colleges and other training providers to work in close partnership with employers, to design a curriculum where they want to hire the people coming out of these programs right away”


42

Austan GoolsbeeYale ’91

Obama’s 2nd CEA Chair

http://www.nytimes.com/2010/10/03/business/economy/03skills.html?_r=1&partner=rss&emc=rss

Just a Cycle?State of the Union 2013.2.12

Our first priority is making America a magnet for… manufacturing. After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three….

(APPLAUSE)

There are things we can do, right now, to accelerate this trend. Last year, we created our first manufacturing innovation institute in Youngstown, Ohio….


43

http://theweek.com/article/index/240029/state-of-the-union-6-highlights-from-president-obamas-address

Applications of multiple-cone HO

44

Applications of Multiple-Cone HO

• Wage and product-mix variation within countries

• Development paths

• Production fragmentation

• A three-factor multiple-cone model

• Is China different?

45







46

wage and product mix variation within countries

47

US

China

Wage variation within countries

• So far, we have thought of countries as being represented by a single endowment point

• E.g., China and the US

• But what if regions within countries spanned cones?

48

Skill

1/wCHL

Apparel

Aircraft

Footwear

Chemicals

1/wUSL

1/wCHK

1/wUSK

Raw Labor

Northeast (Boston, NY)

Appalachia

FPE Within Countries?

• Some regions within the United States are far more skill abundant than others

• E.g., the northeast versus Appalachia

• Evidence?

49

Apparel

Aircraft

Chemicals

Footwear

1/wAPPALL1/wBOS

L

1/wAPPALK

1/wBOSK

Skill

Raw Labor

Relative Wages (wSkilled/wUnskilled) by “Labor Market Areas”

Skill Abundant(Low Skill Premium)

Middle Skill Scarce(High Skill Premium)

Source: Bernard et al (2012) 50

http://faculty.som.yale.edu/peterschott/files/research/papers/usfpe_038.pdf



Relative Wages (wSkilled/wUnskilled) by “Labor Market Areas”

Skill Abundant:Low Skill Premium

Middle Skill Scarce:High Skill Premium

51

Over time, skill premia have widened.

Can you tell a story with this outcome?

Source: Bernard et al (2012)




FPE Within Countries?Bernard et al. 2012

• Do regions of the US produce the same mix of goods?

• No!

– In a given year, regions produce fewer manufacturing industries in common the more different are their skill premia

– Over time, regions whose skill premia diverge move to product mixes that become more dissimilar

• Why would skill premia diverge?

52

Andy BernardTuck

Steve ReddingPrinceton

Pete SchottYale SOM


Implications?

53

Appalachia

Apparel

Aircraft

Chemicals

FootwearChina

Mexico

Skill

Raw Labor

Northeast (Boston, NY)

U.S. returns to labor after trade liberalization when labor is immobile

Sources of U.S. Apparel Import Growth During the 1990sComplicated Figure….but Cool

54

There is an arrow for each country

Where the arrow starts represents level of US apparel imports in 1990

Where it ends represents US apparel imports in 1998

Inner rings represent greater imports than outer rings

Compass points represent different regions of the world, e.g., Southeast Asia

Look at Mexico

Source: Gereffi 2001.

http://www.tx.ncsu.edu/jtatm/volume2issue1/articles/gereffi/gerefficompletea.pdf

http://www.tx.ncsu.edu/jtatm/volume2issue1/articles/gereffi/gerefficompletea.pdf

Implications?

• Autor, Dorn and Hanson (2012) examine US regions’ exposure to Chinese import competition between 1990 and 2007

• The find that social welfare paymentsrise sharply with this exposure

55

David AutorMIT

David DornCEMFI

Gordon HansonUCSD



The Geography of Government Benefits(All benefits; NYT 2012.2.12)

56

http://www.nytimes.com/interactive/2012/02/12/us/entitlement-map.html?ref=us

The Geography of Government Benefits(Income support; NYT 2012.2.12)

57









58

development paths

59

Development Paths

Think about development as the accumulation of capital relative to labor

60

K

Apparel

Aircraft

Footwear

bChem

bF

bAir

Chemicals

L

bApp

QFootwear/LCH

KCH/LCHbF bApp bC bAir

bF bApp bC bAir

QApparel/LCH

KCH/LCH

Development Paths

61

K

Apparel

Chemicals

US

bApp

bC

bF

bF bApp bC bAir

Qi/LCH

KCH/LCH

Footwear

Apparel

Chemicals

Aircraft

bF bApp bC bAir

wCHL

KCH/LCH

bAir

Footwear

Aircraft

L

Evidence?

Japan’s Post-War Development PathMaybe Japan Was Just a Warm-UP (NYT 2011.1.21)

62

K

1/wL

1/wKApparel

Chemicals

1/wL

1/wK

bApp

bC

bF

bAir

Japan1970

Japan1980

Footwear

Aircraft

L

-2.00 -1.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00

Misc Manuf (Apparel)

Machinery

Manuf Materials (Textiles)

Chemicals

Animal Oils

Mineral Fuels

Crude Materials

Beverages, Tobacco

Food

1970

1997

Japan’s Net Exports to the US as a Share of Japan’s GDP

Notes: Total exports are decomposed into the ten categories noted on the y-axis. Negative numbers on the x-axis indicate net imports while positive numbers mean net exports. Data source: U.S. Census Bureau.

http://www.nytimes.com/2011/01/23/business/23japan.html?emc=eta1

More Formal Estimation of Development Paths

• Gather data on industry output by country for a large number of industries and countries

• See if production rises and then falls as a country’s capital labor ratio rises

64

Estimation: does industry i output across countries begin to rise or fall at the same capital abundance ratios across countries?

Qic/Lc

Kc/Lcb1 b2

Each point is a country c’s output per worker in industry i

i = industry c = country

Estimating Development Paths: 1990 Manufacturing DataSchott 2003

65

http://faculty.som.yale.edu/peterschott/files/research/papers/cones.pdf

Estimating Development Paths: 1990 Manufacturing DataSchott 2003

0 10 20 30 40 50 600

500

1000

1500

2000

Electrical Machinery (383)

K/L ($000)

VA p

er T

otal

Lab

or ($

)

CAN

USA

JPN

AUSNZL

AUT

BEL

DNK

FIN

FRA

DEU

GRC

IRL

ITA

NLD

NOR

PRT

ESP

SWE

TUR

GBR

KENZWE MUSZAF MEXGTM CRIPANCOL VENECU

BRA

BOL CHLARGURY

ISR

JORINDLKATHA

MYS

PHL

KOR

Does not look great…

But are all these countries really producing the same “electronics”?

How could you tell?

66



Variation in Country-Industry K/L ($000)Schott 2003

322 Apparel323 Leather

332 Furniture321 Textiles

381 Fabricated M etals331 Wood

383 Electrical M achinery311 Food

355 Rubber314 Tobacco

362 Glass313 Beverages

372 Non Ferrous M etals351 Industrial Chemicals

0

10,000

20,000

30,000

40,000

50,000

60,000

Countries

ISIC Sectors

K ic/Lica

67

Industries sorted by average capital intensity across countries

Countries sorted by capital abundance


Re-think the Evidence?

• Idea: create “synthetic industries” that are more in the spirit of the HO model than whatever statistical agencies are doing when they come up with industry classifications

• That is, create list of country-industries, where each element of the list is one of the bars in the bar chart– Sort the list by capital intensity– Chop the list into synthetic “HO industries”– Re-run the estimation using these synthetic “HO industries”

68

Tex

Oth

Tob

Pott

ElecRub

BevNmet

IronPet

0

10

20

30

40

50

60

70

K

L

Capital Intense Country-Industry Pairs

Medium Capital Country-Industry Pairs

Labor Intense Country-Industry Pairs

Development Paths by Synthetic “HO Industries”

69

BOL

LKA

CHL

COL DNK

ECU

FIN

GT M

IND

IRL

MEX

PANPHL

PRTZWE

VEN0

50

100

150

Val

ue-A

dded

per

Wor

ker (

$)

0 20 40 60Co un try C ap ita l p e r Labo r Ra tio ($000)

Labor-Intensive HO Aggregate

AUS

AUTBEL

BOL

CAN

LKA

CHL

COL

DNK

ECU

FIN

DEU

GRC

GTM

IND

IRL

ISR

ITA

JPN

KORMYS

MEX

NZL

NOR

PAN

PHL

PRT

ZWE

ESP

SWETUR

GBR

USA

VEN

0

250

500

750

1,000

Val

ue-A

dded

per

Wor

ker

($)

0 20 40 60C ou nt ry Cap ita l pe r Lab or Ra tio ($000)

Midd le HO Aggregate

AUS

AUTBEL

BOL

CAN

LKACHL

COL

DNK

ECU

FIN

FRA

DEU

GRC

IND

IRL

ISR IT A

JPN

KOR

MYSMEX

NLD

NZL

NOR

PANPHL

PRT

ZWE

ESP

SWE

TUR

GBR

USA

VEN0

5,000

10,000

15,000

20,000

Val

ue-A

dded

per

Wor

ker

($)

0 20 40 60Co u ntry Capita l pe r Lab or Ratio ($000)

Capital-Intensive HO Aggregate

Main relationship

Confidence interval

Source: Schott 2003


HO Development Paths and Product Cycles

• Countries movement through development paths is similar to the ideaof “product cycling” pioneered by Raymond Vernon

• In Vernon’s model: – New products are invented in capital and skill abundant countries– After a new product starts trading widely in world markets,

production re-locates to areas where it can be produced more cheaply

70

Raymond VernonHarvardGood 1’s production in the

US declines as production moves offshore US

Production

Time

Good 1 is invented and produced in the US

Good 2 is invented in the US

Good 2 moves offshore….and so on..

(Note that the HO model has nothing to say about how new products arise. We will discuss product innovation further, later in the course.)

Development Paths and “Creative Destruction”Schumpeter 1942

• The opening up of new markets, foreign or domestic, and the organizational develop-ment from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation…that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

• This process of Creative Destruction is the essential fact about capitalism.

• It is what capitalism consists in and what every capitalist concern has got to live in. . . .

71

Joseph Schumpeter1883-1950







72

production fragmentation

73

Industry Evolution and Offshoring

• Suppose initially that the US produces all three parts of a supply chain domestically

• This could be for autos, aircraft, toys, apparel, etc.

74

K, Skill

Parts

Assembly

bR&D

bA

bParts

US

1/wL

1/wK

L

R&D


• With NAFTA, U.S. firms have the option to offshore part of the production process

• From the perspective of the US, NAFTA causes PAssembly to fall

• If PR&D and PParts do not change, US firms will choose to perform assembly in Mexico but keep R&D and parts production in the US

• In the US, returns to labor and skill do not change (as long as factors are mobile); in the short run factors deployed in assembly may take a hit

75

Parts

Assembly

bR&D

bA

bParts

US

1/wL

1/wK

L

R&D

Mex

K, Skill

Long-Run Changes in U.S. GDP Shares

Industry 1970 2006Agriculture 2.6 1.0Mining 1.4 2.0Manufacturing 22.7 11.7Services 73.3 85.3

Finance, Insurance and Real Estate 14.6 20.9Professional 5.4 11.8Health 3.2 6.8Education 0.7 0.9

Other 50.1 45.8Total 100 100

Source: BEA.

76


• Another example, in services, would allow low-level, easily codified tasks to be outsourced

• E.g. coding versus software design in IT, bookkeeping versus consulting in accounting, spreadsheet building versus deal conceptualization in finance

77

Apparel

Aircraft

Footwear

IT

Labor

US, Software Design

, Coding

K, Skill







78

a three-factor multiple-cone model

79

Three-Factor, Multiple-Cone HOLeamer 1987

• Now three factors of production: labor, capital and human capital

• Industries’ input intensities as well as countries’ factor abundances are represented by rays from the origin, as before

• They pierce an “endowment triangle” (simplex)

80

Human Capital

CapitalLabor

http://www.jstor.org/pss/1833125


Three-Factor, Multiple-Cone HOLeamer 1987

• Now three factors of production: labor, capital and human capital

• Industries’ input intensities as well as countries’ factor abundances are represented by rays from the origin, as before

• They pierce an “endowment triangle” (simplex)

• Can you “see” that, in equilibrium, there will be an isocost plane that must be tangent to three isoquants

• And that the intercepts of this plane mark the inverse of the relative wages, just like before?

• Ok, now just focus on the triangle, and forget the axes….

81

Human Capital

CapitalLabor

1/wK1/wL

1/wH



Endowment Triangle

82

Human Capital

KL

• Each side of the endowment triangle measures the intensity of the two factors anchoring it

• As you move along the side of an endowment triangle, the intensities rise or fall

• Any point along a ray from one vertex of the triangle to its opposing side picks out points with the same input intensity of the opposing side

K/L=11,000 K/L=99,000

More K/L

More H/KMore H/L

These industries have the same K/L but

different H/L and H/K

Endowment Triangle

83

Human Capital

KL

• Movement of a country within the endowment triangle indicates changes in its use of factors

• As a country moves along the green line, it becomes more K/L and K/H intensive; i.e., it is capital deepening, just as before

More K/L

More H/KMore H/L

This industry is becoming more capital

intensive over time because it is moving toward the K vertex

Example: US Manufacturing Industries Over Time1958-2005

Example: Product Penetration by Low-Wage Countries

85

Low High

Example: Country Factor Endowments, 1990

86Source: Leamer et al 1999.

Labor

Cropland

Capital0.03 0.08 0.17 0.33 0.83

0.01

0.03

0.05

0.10

0.25 0.67

1.67

3.33

6.67

16.67

ARG

AUS

AUT

BEL

BEN BOL

BRACAN

CHE

CHL

CHN

CMR

COLCRI

DEU

DNK

DOMECU

ESP

FINFRA

GBR

GHA

GRC

GTM

HKG

HUN

ICE

IDN

IND

IRL

ISRITA

USA

JPN

KEN

KOR

LIB

LKA

MEX

MUS

MWI

MYS

NLDNORNZL

OAN

PAK

PAN

PERPHL PRT

PRY

SGP

SLE

SLV

SWE

SYR

Labor / Cropland Cropland / Capital

Labor / Capital

http://www.sciencedirect.com/science/article/pii/S0304387899000048

Income Inequality by Factor Abundance1990

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Low High

Paths of Development RevisitedLeamer et al 1999

88

Land

KLApparel Machinery

Footwear

Peasant Farming

Temporary Crops

Permanent Crops

• Peasant agricultureUses little capital and large amounts of labor compared with land

• Temporary crops Picked by handRequires more land per workerK/L at the low end of manufacturing

• Permanent cropsPicked by machinesK/L at the higher end of manufacturing

• Footwear, apparel and machinery use increasing amounts of capital per labor but no land






89

Land

KLApparel Machinery

Footwear

Peasant Farming

Temporary Crops

Permanent Crops

• Can you “see” how the triangles A, B, C, D and E are higher-dimensional cones?• They are “tilted” like facets of a diamond, as they are

associated with different factor rewards

• Can you “see” how the formation of these cones depend on product prices?

• Can you “see” that a country with endowments within these cones would produce the three goods that anchor them?• Recall zero profit conditions

AB

C

D

E






90

Land

KLApparel Machinery

Footwear

Peasant Farming

Temporary Crops

Permanent Crops

AB

C

D

E

• Land scarce countries (e.g., Taiwan?)– Capital accumulation leads to a development

path like the ones we have been talking about in the two-factor models up to this point

• Land-abundant countries (e.g., Philippines?)– Capital accumulation leads to a shift away from

temporary crops in favor of permanent crops…– Once suffcient capital is accumulated to get to

B, the country begins to industrialize

• But what if “riskiness” associated with land abundance deters capital accumulation?– B is a “high-risk” cone for capital since variation

in the price of the crop affects the return to capital.

– If global investors try to avoid cone B, the emergence of manufacturing may be delayed, preventing increases in the return to labor that normally come with capital accumulation





Political EconomyEngerman and Sokolov (1997)

91

Endowments Relative Wages

Endowments Relative WagesPoliticalInstitutions

?

http://ideas.repec.org/p/nbr/nberhi/0066.html




Political EconomyEngerman and Sokolov (1997) and Leamer et al (1999)

• Some forms of land abundance (southern U.S., the tropics) foster unequal land ownership– The scale economies associated with raising permanent crops such as sugar and

coffee fuel the acquisition of ever greater plantations

• Because plantations encouraged the use of slaves, land-owners remain a small minority in these economies– Great disparities in wealth– Politics of exclusion

• Other forms of land abundance (e.g., northern U.S. and Canada) feature little or no scale economies– Family-owned or small-holder farms emerge– Slaves not viable in production– Population is more homogenous, racially and economically – Political institutions evolve to stress a voice for all– Less inequality, greater growth?

92






Income Inequality by Factor Abundance1990

93

Low High







94

End

95

optional extra material

96

Khandelwal cycling

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Perspective: The World Does Not Stand StillKhandelwal 2009

98

Qua

lity

Ladd

er

ApparelElectronics

China

US

US

China

VietnamVietnam

http://www0.gsb.columbia.edu/faculty/akhandelwal/papers/ladders_81.pdf

http://www0.gsb.columbia.edu/faculty/akhandelwal/papers/ladders_81.pdf

Lecture notes international Economics

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Transcript of Lecture notes international Economics