Ricardo, David (1817): On the Principles of Political Economy and Taxation . London.
description
Transcript of Ricardo, David (1817): On the Principles of Political Economy and Taxation . London.
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
1
Ricardo, David (1817): On the Principles of Political Economy and Taxation. London.
Heckscher, Eli (1919): The Effect of Foreign Trade on the Distribution of Income, Ekonomisk Tidskrift, 497-512.
Ohlin, Bertil (1933): Interregional and International Trade. Cambridge, Mass.
Krugman, Paul (1980): Scale Economies, Product Differentiation, and the Pattern of Trade. American Economic Review 70, 950-959.
Markusen, James R. (1981): Trade and the Gains from Trade with Imperfect Competition. Journal of International Economics 11, 531-551.
Markusen, James R. (2002): Multinational Firms and the Theory of International Trade. Cambridge, Mass.
Helpman, Elhanan (1984): A Simple Theory of International Trade with Multinational Corporations. Journal of Political Economy 92, 451-471.
Source: van Marrewijk, C. (2002): International Trade and the World Economy. Oxford et al.
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
2
Differences in Endowments: The Heckscher-Ohlin Model
Ricardo-Model: Trade due to differences in labor productivity
Heckscher-Ohlin Model: Trade due to differences in factor endowments, technologies identical across countries
Assumptions:
• perfect competition in all markets
• two countries
• two homogenous goods, computer and clothes
linear homogenous production technologies, identical for both countries:
0
dada
a,afd,0
dada
a,afd
,0da
a,afd,0
da
a,afd
,0a
a,af,0
a
a,af
,a,afx
KkLk
LkKkk2
LkKk
LkKkk2
2Lk
LkKkk2
2Kk
LkKkk2
Lk
LkKkk
Kk
LkKkk
LkKkkk
k, computer, clothes
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
3
• two homogenous factors of production, capital K and labor L, supply completely price
inelastic
• factors of production mobile between sectors, but immobile between countries
• general equilibrium model: goods and factor prices lead to an equilibrium on all goods and
factor markets
• homothetic preferences, identical across countries
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
4
Notation:
factor input coefficients: first index: factor of production, second index: good
LCa
KCa
LKa
KKa
labor per unit computer
capital per unit computer
labor per unit clothes
capital per unit clothes
factor endowments:
DL labor, Germany
capital, Germany
labor, China
capital, China
DK
CL
CK
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
5
iso-cost line
per unit production isoquant
w
ra
w
Ca KKLK
LKKKK a,af1
LKa
KKa
•*LKa
*KKa
*KK
*LK
a
a
w
r
Figure 1
0
Deriving the factor input coefficients:
graphical:
Minimize per unit cost, given that one unit of output is produced:
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
6
With Cobb-Douglas production technologies:
,aaQ
,aaQ
LCKCC
LKKKK
1
1
LKKKLKKK aaawar 11
KK
LK
a
a
w
r
1
1
1 1
w
raa KKKK
1
1
1
w
ra
r
wa
LK
KK
11
1 11
w
r
wr
wr
a
a
KK
LK
1wr
aa KKLK
10
10
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
7
...and for computer:
1wr
aa KCLC
Assumption: ,
computers more capital intensive in production, compared to clothes
computer capital intensive, clothes labor intensive
11
KK
LK
a
a
w
r
clothes, slope
computer, slope
KC
LC
a
a
1
1
no reversal in factor intensities
figure 2
0
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
8
relative goods prices and relative factor prices
perfect competition on goods and factor markets
zero profit conditions hold:
,pr,wawr,war
pr,wawr,war
CLCKC
KLKKK
in the example:
C
K
pw
rw
r
wr
pw
rw
r
wr
1
1
1
1
1
1
C
B
K
A
pwr
pwr
11
11
1
1
1
1
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
9
wr
wr
A
B
p
p
K
C
1
1
w
r
A
B
p
p
K
C
K
C
p
p
w
r
Stolper-Samuelson Theorem (weak version):
In a neoclassical framework with two final goods and two factors of production, an increase in the relative price of a final good increases the relative price of the factor of production used intensively in the production of that good and reduces the reward to the other factor, provided both goods are produced.
Opening up a country to international trade may generate conflicts between households
figure 3
0
1
w
r
A
B
wr
pp KC > 0
012
2
2
w
r
A
B
wrd
ppd KC
2
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
10
Merging both figures:
clothes
computerw
r
K
C
p
p
KK
LK
a
a,
a
a
KC
LC
unique relationship between relative goods prices and factor input ratio:
An increase in the relative price to leads to an increase in the labor intensity
in producing both goods.
1K
C
p
p
2K
C
p
p
1
w
r
2
w
r
1KK
LK
a
a
2KK
LK
a
a
1KC
LC
a
a
2KC
LC
a
a
2K
C
p
p
1K
C
p
p
figure 4
0
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
11
Stolper-Samuelson Theorem (strong version):
In a neoclassical framework with two final goods and two factors of production, an increase in the relative price of a final good increases the real reward - in units of both goods - of the factor of production used intensively in the production of that good and reduces the real reward - in units of both goods - to the other factor, provided both goods are produced.
Example:see figure 2:
clothes
computer
see figure 3:
KK
LK
K
C
a
a
A
B
p
p 1
1
1 B
A
p
p
a
a
K
C
KK
LK
KC
LC
K
C
a
a
A
B
p
p 1
1
1 B
A
p
p
a
a
K
C
KC
LC
KC
LC
KK
LK
a
a
w
r
a
a
w
r
1
1
w
r
A
B
p
p
K
C
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
12
Furthermore, due to profit maximizing factor input of firms,
factor price = marginal value product
LK
LKKKFK
LC
LCKCCC
KK
LKKKFK
KC
LCKCCC
a
a,afpw
a
a,afpw
a
a,afpr
a
a,afpr
see figure 4
KC
LC
KC
LCKCC
a
a
a
a,af1
1
LC
KC
LC
LCKCC
a
a
a
a,af
KK
LK
KK
LKKKK
a
a
a
a,af1
1
LK
KK
LK
LKKKK
a
a
a
a,af
KC
LC
C a
a
p
r1
KK
LK
K a
a
p
r1
An increase in (pC/pK) leads to an increase in (aLC/aKC) as well as (aLK/aKK) - capital gains in units of computer as well as in units of clothes
1
LC
KC
C a
a
p
w
1
LK
KK
K a
a
p
w
Stolper-Samuelson Theorem (strong version):
An increase in (pC/pK) leads to a decline in (aKC/aLC) as well as (aKK/aLK) - labor looses in units of computer as well as in units of clothes
0
1
1
11
B
A
B
A
p
p
pp
aa
K
C
KC
KKLK
0
1
1
11
B
A
B
A
p
p
pp
aa
K
C
KC
KCLC
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
13
Factor endowments and goods production
Assumption: relative goods prices constant
w
r
A
B
p
p
K
C (see previous slide) relative factor prices constant
Edgeworth-Box for a country, e. g. Germany:
0C
0K
CK
KK
CL
KL
KC
LC
a
a
KK
LK
a
a
*CL
*KK
*KL
*CK
figure 5
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
14
Increase in the relative and absolute capital endowment of Germany:( decrease in the relative labor endowment of Germany)
0C
0K
CK
KK
CL
KL
KC
LC
a
a
KK
LK
a
a
*CL
*KK
*KL
*CK
figure 6
0KC
0K‘
*KL
*CK
*KK
*CL
*K
*K
*K
*K
*C
*C
*C
*C
KK
LL
KK
LLabsolute and relative production of computer increases, absolute and relative production of clothes declines
KK
LK
a
a
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
15
Rybczynski-Theorem:
In a neoclassical framework with two final goods, two factors of production, and constant prices of the final goods, an increase in the supply of one of the factors of production results in an increase of the output of the final good that uses this factor of production intensively and a reduction in the output of the other final good, provided both goods are produced in equilibrium.
Expansion to two countries, Germany and China:
• identical homothetic preferences: identical relative demand for computer and clothes, if relative prices are identical
• identical production technologies: identical factor input leads to identical output
• different relative factor endowments: C
C
D
D
L
K
L
K
Germany is relatively well endowed with capital (“relative” to labor, “well” in comparison to China), China is relatively well endowed with labor (“relative” to capital, “well” in comparison to Germany).
Heckscher-Ohlin Theorem:
In a neoclassical framework with two final goods, two factors of production, and two countries which have identical homothetic preferences, a country will export the
good which intensively uses the relatively abundant factor of production.
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
16
Example:
• Germany relatively well endowed with capital
China relatively well endowed with labor
• Computer production intensive in capital
clothes production intensive in labor
LF
KF
LC
KC
a
a
a
a
KF
LF
KC
LC
a
a
a
a
Germany exports computer, China exports clothes
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
17
K
C
p
p
,Q
QD
SK
SC
,
Q
QC
SK
SC
,
Q
QD
DK
DC
C
DK
DC
Q
Q
D
SK
SC
Q
Q
C
SK
SC
Q
Q
D
DK
DC
Q
Q
C
DK
DC
Q
Q
Relative supply of computer, Germany
Relative supply of computer, China
Relative demand for computer, Germany
Relative demand for computer, China
relative demand for computer, identical across countries due to identical homothetic preferences
relative supply of computer, China
Relative supply of computer, Germany, larger than China’s relative supply of computer due to Rybczynski-Theorem
.Aut
CK
CC
p
p
.Aut
DK
DC
p
p
FT
K
C
p
p
I II III IV
I: relative supply of China, free trade
II: relative supply = relative demand of China, autarky
V
III: relative demand of both countries, free trade
IV: relative supply = relative demand of Germany, autarky
V: relative supply of Germany, free trade
figure 8
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
18
Graphical “proof” of the Heckscher-Ohlin theorem:
A country achieves a higher level of welfare, if it specializes according to the Heckscher-Ohlin theorem (Maintained assumption: Costless restructuring)
.
.
AutDK
AutDK
Q
C
tradefreeDKQ
Germany China
DCQ
DKQ C
KQ
CCQ
tradefree
K
C
p
p
tradefreeDKC
tradefreeU
.AutU
.Aut
DK
DC
p
p
tradefreeDCC
.AutD
C
.AutDC
Q
C
tradefreeDCQ
tradefreeCKQ
tradefree
K
C
p
p
tradefreeCKC
.AutC
K
.AutCK
Q
C
tradefreeCCQ
.AutC
C
.AutCC
Q
C
tradefreeCCC
.Aut
CK
CC
p
p
.AutU
tradefreeU
figure 9
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
19
Goods trade and intranational income distribution:
Germany:
Opening Germany up to free trade leads to an increase of the relative price of
computer;
Stolper-Samuelson Theorem:
relative and real reward of capital increases, relative and real reward of labor declines
Opening Germany up to free trade leads to an increase in real factor income for
households, which are endowed with the factor the country is relatively well endowed
with. Households, which are endowed with the factor the trade partner is relatively well
endowed with, loose in real factor income, if the country is opened to free trade.
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
20
Goods trade and factor price equalization:
Trade leads to equalization of relative and absolute goods prices:
Equalization of relative and absolute factor prices:
see figure 3
K
C
p
p
w
r
figure 3
definite relationship between relative goods prices and relative factor prices
goods trade is a perfect substitute to factor trade:
Germany exports capital, which is embodied in the exports of computers,
China exports labor, which is embodied in the exports of clothes
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
21
No convergence in factor prices;
Reason?
C
DDDDLC
DDDDKC
KDDDD
LKDDDD
KK
DDC
DDDLC
DK
DDDLK
DDC
DDDKC
DK
DDDKK
pwr,warr,wa
pwr,warr,wa
LQr,waQr,wa
KQr,waQr,wa
factor market equilibrium conditions:
Germany:
C
CCCCLC
CCCCKC
KCCCC
LKCCCC
KK
CCC
CCCLC
CK
CCCLK
CCC
CCCKC
CK
CCCKK
pwr,warr,wa
pwr,warr,wa
LQr,waQr,wa
KQr,waQr,wa
zero profit conditions:
Germany: China:
China:
If the number of goods is larger/equal to the number of factors of production ( number
of zero profit conditions is larger/equal to the number of factors), if trade leads to
identical goods prices across countries, and if the production technologies are identical
across countries ( ) identical zero profit condition are solved for the
factor prices in both countries.
CCCij
DDDij r,war,wa
Factor price equalization theorem
Prof. Dr. Volker ClausenUniversität Duisburg-EssenCampus Essen
22
Factor price equalization results.
Possible reasons for incomplete factor price equalization:
• specialization in production, Germany only produces computer, China produces only
clothes
only one zero profit condition per country, determination of factor prices also requires
factor market equilibrium conditions;
differences in relative factor endowments lead to differences in absolute factor prices
• differences in production technologies,
zero profit conditions may be solved for the factor prices,
however, not identical zero profit conditions are solved for factor prices
• no equalization of goods prices due to tariffs, transport costs, etc.
right hand sides of the zero profit conditions are not identical
CCCij
DDDij r,war,wa