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Sources of Comparative Advantage Outline
Scale Economies (i.e., Increasing Returns Sources of Comparative Advantage
The Heckscher-Ohlin Model
to Scale) Main Idea
Definition: Average cost falls as output rises Intuition
Leads to lower cost for large countries Does the Theory Work?
Effects of Trade
Problem: scale economies also lead to large Changes in Production
firms, and therefore imperfect competition Factor Price Equalization
(Well deal with this later today, under New Trade The New Trade Theory
Theory) Assumptions
Implications
Lecture 4: Modern Theories 7
The New New Trade Theory
Lecture 4: Modern Theories 8
2
The Heckscher-Ohlin Model The Heckscher-Ohlin Model
1. Countries differ in endowments of factors Implication of #1 and #2:
2. Industries differ in factor intensities Heckscher-Ohlin Theorem:
Examples:
Countries have comparative advantage in,
Agriculture uses lots of land
Textiles & apparel use lots of unskilled labor and therefore export,
Autos use lots of capital goods that use relatively intensively
Computers use lots of human capital their relatively abundant factors
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Effects of Trade
Outline
(according to H-O Theory)
Sources of Comparative Advantage Trade causes:
The Heckscher-Ohlin Model Production: of export good
Main Idea
of import good
Intuition
Does the Theory Work? Factors (labor, capital, etc.) to move industries:
Effects of Trade toward export sector
Changes in Production Industries expand, contract, or may disappear
Factor Price Equalization (as in Ricardian model)
The New Trade Theory Factor demands: for abundant factor
Assumptions for scarce factor
Implications Factor prices: for abundant factor
The New New Trade Theory
Lecture 4: Modern Theories 19 Lecture 4:for scarce
Modern Theories factor 20
Effects of Trade
(according to H-O Theory) Wolfgang Stolper and Paul Samuelson
Two important implications for factor prices:
Factor Price Equalization
Trade causes prices of factors in different countries to move
together, even to become equal across countries
Stolper-Samuelson Theorem
Real price (i.e., wage in terms of goods it can buy) of a
countrys abundant factor rises due to trade
Real price (wage) of its scarce factor falls
NOTE: This means that there are losers from trade: the
owners of a countrys scarce factor.
(In the US, that is (unskilled) labor)
Lecture 4: Modern Theories 21 Lecture 4: Modern Theories 22
4
Outline The New Trade Theory
Sources of Comparative Advantage New Trade Theory
The Heckscher-Ohlin Model
Main Idea Developed in the early 1980s
Intuition Most prominent contributor was Paul
Does the Theory Work? Krugman, now a New York Times columnist
Effects of Trade Won Nobel Prize 2008
Changes in Production
Factor Price Equalization
The New Trade Theory
Assumptions
Implications
The New New Trade Theory
Lecture 4: Modern Theories 25 Lecture 4: Modern Theories 26
5
The New Trade Theory The New Trade Theory
Explanations for IIT Explanations for IIT
Definitions of industry may be too large, Same good sold across different borders
and include
Different, but similar, products
Toyotas
Fords
Goods at different stages of processing
Autos
Auto parts
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The New Trade Theory The New Trade Theory
2. Countries may lose from trade 3. More and broader reasons for countries to gain
This is not actually likely, but it wasnt even from trade
possible in the Ricardian and H-O Models New gains from each new assumption:
Cost reductions due to scale economies
One story: small country may be forced to Reduced market distortions due to increased competition
specialize in an industry with decreasing Consumer benefit from access to more variety
returns to scale Implication: It is possible for all people in a country
to gain from trade
Contrast to H-O Model and Stolper-Samuelson Theorem,
where somebody must lose
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The New Trade Theory The New Trade Theory
Boeing-Airbus Game results 4. New rationales for using policy to restrict
If Boeing moves first, without subsidy Airbus trade
will not enter But note Krugmans conclusion: These
Boeing and US gain +100 arguments are not likely to be usable:
Airbus and EU gain 0 Empirical difficulties: Hard to know where to
If EU pays subsidy, Airbus will enter and intervene
Boeing will exit Entry: Benefits will be dissipated by new firms
Airbus gains 110, EU gains 100 (=100-10) General equilibrium: Help in some sectors hurts
Boeing and US gain 0 others
Retaliation: Other countries may react
Thus EU gains and US loses from EU subsidy
Political economy: Industries lobby for help
Lecture 4: Modern Theories 43 Lecture 4: Modern Theories 44