Economics 184 International Trade

Topic 4a: Multiple-Cone HO

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

Administrative

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

Motivation

2011.5.13

Motivation

2011.5.13

Motivation

2011.5.13

K bC

1/wK

Autos

US CHN Toys Do the US and China really produce the same set of goods?

bA

L 1/wL

This Time
Models Ricardian Model Single-Cone HO Model Ricardo-Viner Model Multiple-Cone HO Model 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?

Krugman Model Krugman-Melitz Model HO + Krugman-Melitz

Trade Liberalization in the 2x2x2 HO Model

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)

QChem

Chemicals

US

US

Apparel

QApp

10

Reallocation and Trade

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 Dobbs Congressional Testimony 2007.3.28

11

US Manufacturing Employment,1948-2013

2001-4 -3 million jobs Where did these workers go?

www.bls.gov

12

U.S. GDP Shares

Industry Agriculture Mining Manufacturing Services Finance, Insurance and Real Estate Professional Health Education Other Total
Source: BEA.

1970 2.6 1.4 22.7 73.3 14.6 5.4 3.2 0.7 50.1 100

2006 1.0 2.0 11.7 85.3 20.9 11.8 6.8 0.9 45.8 100

13

Similar Changes Are Occurring Across the Developed World

Source: Industrial Metamorphisis (Economist 2005.9.29).

14

Just a Cycle?

www.bls.gov

15

Just a Cycle?

There are jobs -- lets have a little straight talk here -- there are some jobs that arent coming back to Michigan.

There are some jobs that wont come back here to South Carolina.
(Etc.)
John McCain On the campaign trail, 2008

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

16

Just a Cycle?

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.

17

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

Just a Cycle?
Whos Right? How Can We Tell?

Questions
(Issues)

Theory
(Stories)

Data
(Evidence)

19

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
21

Single-Cone HO Two factors of production Two countries Two industries FPE

Incomplete specialization

Remember This Slide?

From HO: How Does Comparative Advantage Arise?

U.S. Snowboard Imports, 2001 Average Value Quantity Price ($mill) (000) ($/board) Canada 16.6 427 39 Austria 15.1 235 64 China 14.5 243 60 Spain 5.8 65 89 Germany 3.8 54 70 France 2.3 20 115 Tunisia 1.7 19 89 Mexico 1.7 208 8 Italy 1.6 32 50 Taiwan 0.7 52 14 Switzerland 0.7 6 117 Bulgaria 0.5 9 53 Other 17.6 450 39 Total 82.6 1820 45
Source: U.S. Census Bureau.

In 2001, the U.S. imported snowboards from 24 countries Who are the largest exporters? Why?

22

Remember This Slide?

From HO: How Does Comparative Advantage Arise?

U.S. Snowboard Imports, 2001 Average Value Quantity Price ($mill) (000) ($/board) Canada 16.6 427 39 Austria 15.1 235 64 China 14.5 243 60 Spain 5.8 65 89 Germany 3.8 54 70 France 2.3 20 115 Tunisia 1.7 19 89 Mexico 1.7 208 8 Italy 1.6 32 50 Taiwan 0.7 52 14 Switzerland 0.7 6 117 Bulgaria 0.5 9 53 Other 17.6 450 39 Total 82.6 1820 45
Source: U.S. Census Bureau.

In 2001, the U.S. imported snowboards from 24 countries Who are the largest exporters? Why?

23

Multiple-Cone HO with Special Prices

US
Aircraft

bAir K

Suppose there are two factors but four goods

bChem

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?

Chemicals

bApp

Apparel

bFoot L

Footwear

24

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

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

bAir K

bChem

Chemicals

Mexico bApp
Apparel

China
Footwear

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

bFoot 1/wLUS 1/wLMex 1/wLChn L

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

25

Remember this Slide

From HO: Is FPE Realistic?

No, its almost unthinkable and certainly highly improbable.

Bertil Ohlin 1933

26

Remember this Slide

From HO: Is FPE Realistic?

Average Nominal Monthly Wages, 2010

PPP Adjusted International Dollars

Source: ILO.

27

The Global Labor Pool

50 30 40

US
20

1980

10

Mexico China

0
Source: Leamer and Schott (2005).

.2

.4 .6 Population Share

.8

28

modelling trade liberalization with multi-cone HO

29

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

QChem

Chemicals

US

US

Apparel

QApp

30

Trade Liberalization in Multiple-Cone HO

bAir K US
Aircraft

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 31 Footwear)

bChem

Chemicals

bApp
Apparel

China bFoot L

xx

Footwear

Capitalism, Socialism and Democracy

Schumpeter 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.

Joseph Schumpeter 1883-1950

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

Trade Liberalization in Multiple-Cone HO

bAir K US
Aircraft

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?

bChem

Chemicals

bApp
Apparel

xx

Footwear

bFoot L

33

Trade Liberalization in Multiple-Cone HO

Fixed Factors Example

bAir K US
Aircraft

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

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
bFoot 1/wLFoot L

Chemicals

bApp
Apparel

Footwear

1/wL 1/wLApp

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?)

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

Trade Liberalization in Multiple-Cone HO

Fixed Factors Example

bAir K US
Aircraft

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
bApp

bC

Chemicals

Apparel

The wages of labor trapped in Apparel and Footwear fall even more
bFoot L

Footwear

1/wL 1/wLApp

1/wLFoot

What if there are different types of workers?

35

Human Capital in Multiple-Cone HO

Skilled Workers

US
Aircraft

Chemicals

Apparel Footwear

Unskilled Workers

36

U.S. Wages by Education Level

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

Source: Autor, Katz and Kearny (2007)

37

U.S. Wages by Education Level

Aircraft

Apparel

Source: Autor, Katz and Kearny (2008).

38

U.S. Wages by Education Level

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

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 How is this policy motivated by the model?
Austan Goolsbee Yale 91 Obamas 2nd CEA Chair

42

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.

How is this policy motivated by the model?

43

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

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?

46

wage and product mix variation within countries

47

Wage variation within countries

Skill
1/wUSK

US
Aircraft

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?
Raw Labor

Chemicals

1/wCHK

Apparel Footwear

China
1/wUSL 1/wCHL

48

FPE Within Countries?

Skill
1/wBOSK

Northeast (Boston, NY)

Aircraft

Some regions within the United States are far more skill abundant than others E.g., the northeast versus Appalachia
Footwear

Chemicals

1/wAPPALK

Apparel

Evidence?
Raw Labor

Appalachia
1/wBOSL 1/wAPPALL

49

Relative Wages (wSkilled/wUnskilled) by Labor Market Areas

Skill Abundant (Low Skill Premium)

Source: Bernard et al (2012)

Middle

Skill Scarce (High Skill Premium) 50

Relative Wages (wSkilled/wUnskilled) by Labor Market Areas

Over time, skill premia have widened. Can you tell a story with this outcome?

Skill Abundant: Low Skill Premium

Source: Bernard et al (2012)

Middle

Skill Scarce: High Skill Premium

51

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
Andy Bernard Tuck

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

Steve Redding Princeton

Pete Schott Yale SOM

52

Implications?

Skill
Aircraft

Northeast (Boston, NY)

Chemicals

Apparel

Mexico
Footwear

Appalachia

China Raw Labor

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

53

Sources of U.S. Apparel Import Growth During the 1990s

Complicated Figure.but Cool

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.

54

Implications?

Autor, Dorn and Hanson (2012) examine US regions exposure to Chinese import competition between 1990 and 2007
The find that social welfare payments rise sharply with this exposure
David Dorn CEMFI Gordon Hanson UCSD David Autor MIT

55

The Geography of Government Benefits

(All benefits; NYT 2012.2.12)

56

The Geography of Government Benefits

(Income support; NYT 2012.2.12)

57

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?

58

development paths

59

Development Paths
Think about development as the accumulation of capital relative to labor
QFootwear/LCH

bAir K
Aircraft

bChem

Chemicals

bApp
Apparel Footwear

bF

bApp

bC

bAir

KCH/LCH

QApparel/LCH

bF L

bF

bApp

bC

bAir

KCH/LCH 60

Development Paths
Qi/LCH
Aircraft

bAir K US
Aircraft

Chemicals Apparel Footwear

bC

Chemicals

bF

bApp

bC

bAir

KCH/LCH

Evidence?
bApp
wCHL

Apparel Footwear

bF L
bF bApp bC bAir KCH/LCH

61

Japans Post-War Development Path

Maybe Japan Was Just a Warm-UP (NYT 2011.1.21)

bAir K
Aircraft

Japans Net Exports to the US as a Share of Japans GDP

Food

1/wK

bC Japan1980

Beverages, Tobacco Crude Materials Mineral Fuels

Chemicals

Japan1970 1/wK
Apparel

Animal Oils Chemicals

1970 1997

bApp
Footwear

Manuf Materials (Textiles) Machinery Misc Manuf (Apparel)

bF 1/wL 1/wL L

-2.00 -1.00 0.00

1.00

2.00

3.00

4.00

5.00

6.00

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.

62

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 countrys capital labor ratio rises

Qic/Lc

Each point is a country cs output per worker in industry i

b1

b2

Kc/Lc

i = industry c = country

Estimation: does industry i output across countries begin to rise or fall at the same capital abundance ratios across countries? 64

Estimating Development Paths: 1990 Manufacturing Data

Schott 2003

65

Estimating Development Paths: 1990 Manufacturing Data

Schott 2003

Electrical Machinery (383)

Does not look great

2000

DEU

VA per Total Labor ($)

But are all these countries really producing the same electronics? How could you tell?
IRL ISR AUT KOR GBR SWE NLD BEL ITA

JPN

1500

1000

FRA

USA FIN CAN

500
MYS BRA PRT GRC ARG THA ZAF TUR MEX URY VEN PHL CRI COL ZWE JOR CHL GTM MUS ECU IND PAN 0 KEN BOL LKA

DNK ESP NZL

NOR AUS

10

20

30 40 K/L ($000)

50

60

66

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

Schott 2003

Industries sorted by average capital intensity across countries Countries sorted by capital abundance

67

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
K Capital Intense Country-Industry Pairs

Medium Capital Country-Industry Pairs

Labor Intense CountryIndustry Pairs

68

Development Paths by Synthetic HO Industries

Labor-Intensive HO Aggregate
150 1,000

Middle HO Aggregate
CAN DNK

Capital-Intensive HO Aggregate
20,000
DEU

LKA

Value-Added per Worker ($)

Value-Added per Worker ($)

750

GBR ISR ESP USA JPN SWE BEL DEU KOR IRL AUT FIN NOR ITA NZL AUS

100

VEN MEX CHL PAN COL GTM PHL ZWE TUR GRC

15,000

500

10,000

50

PAN PHL COL

DNK IRL

FIN

MYS

250

5,000
PRT GRC CHL MYS TURVEN ECU ZWE COL PHL PAN MEX BOL IND LKA

FIN USA BEL GBR AUT FRA CAN DNKNLD AUS NOR ESP KOR ITA ISR

IRL

SWE JPN

ZWE GTM BOL PRT ECU VEN IND MEX

CHL

PRT BOL IND LKAECU

NZL

0 20 40 60 Co un try Cap ital p er Labo r Ratio ($000)

0 20 40 60 Cou nt ry Cap ital per Lab or Ratio ($000)

0 20 40 60 Co u ntry Capital per Lab or Ratio ($000)

Source: Schott 2003

Confidence interval Main relationship

69

HO Development Paths and Product Cycles

Countries movement through development paths is similar to the idea of product cycling pioneered by Raymond Vernon In Vernons 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
Good 1 is invented and produced in the US Good 1s production in the US declines as production moves offshore Good 2 is invented in the US

Raymond Vernon Harvard

US Production

Good 2 moves offshore.and so on..

Time

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

70

Development Paths and Creative Destruction

Schumpeter 1942

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutationthat 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. . . .

Joseph Schumpeter 1883-1950

71

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?

72

production fragmentation

73

Industry Evolution and Offshoring

K, Skill bR&D

Suppose initially that the US produces all three parts of a supply chain domestically
US
bParts
Parts Assembly

1/wK

R&D

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

bA 1/wL L

74

Industry Evolution and Offshoring

K, Skill bR&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

1/wK

R&D

US
bParts
Parts

Mex
Assembly

bA 1/wL L

75

Long-Run Changes in U.S. GDP Shares

Industry Agriculture Mining Manufacturing Services Finance, Insurance and Real Estate Professional Health Education Other Total
Source: BEA.

1970 2.6 1.4 22.7 73.3 14.6 5.4 3.2 0.7 50.1 100

2006 1.0 2.0 11.7 85.3 20.9 11.8 6.8 0.9 45.8 100

76

Industry Evolution and Offshoring

K, Skill

US
Aircraft , Software Design

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
Labor

IT

Apparel, Coding Footwear

77

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?

78

a three-factor multiple-cone model

79

Three-Factor, Multiple-Cone HO
Leamer 1987

Human Capital

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)

Labor

Capital

80

Three-Factor, Multiple-Cone HO
Leamer 1987

Human Capital

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

1/wH

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

1/wL 1/wK

Labor

Capital

Endowment Triangle

Human Capital

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

More H/L More H/K

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

More K/L These industries have the same K/L but different H/L and H/K

82

Endowment Triangle

Human Capital

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

More H/L

More H/K

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

L
More K/L

This industry is becoming more capital intensive over time because it is moving toward the K vertex

83

Example: US Manufacturing Industries Over Time

1958-2005

Example: Product Penetration by Low-Wage Countries

Low

High

85

Example: Country Factor Endowments, 1990

Cropland

0.67

0.25

ARG

Labor / Cropland

CMR BEN BOL MWI 1.67 PAKGTM IND SLV

PRY SYR

Cropland / Capital
0.10 AUS

SLE GHA
3.33

6.67

KEN LIB CHN

16.67

Labor
0.83 0.33

BRA PAN CAN0.05 ECU DOM CHL HUN MEX GRC PER COL PHL CRI PRT ESP LKA 0.03 MYS USA IDN DNK IRL FIN MUS FRA SWE 0.01 ITA AUT ISR NOR GBR NZL BEL KORDEU OAN Capital NLD ICE JPN CHE 0.17 0.08 HKG 0.03 SGP

Labor / Capital
Source: Leamer et al 1999.

86

Income Inequality by Factor Abundance

1990

Low

High

87

Paths of Development Revisited

Leamer et al 1999

Peasant agriculture Uses little capital and large amounts of labor compared with land Temporary crops Picked by hand Requires more land per worker K/L at the low end of manufacturing Permanent crops Picked by machines K/L at the higher end of manufacturing

Land

Temporary Crops Peasant Farming Footwear Apparel Machinery Permanent Crops

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

88

Paths of Development Revisited

Leamer et al 1999

Land

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

Temporary Crops
E

Peasant Farming
A B C

Permanent Crops

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

Footwear Apparel Machinery

89

Paths of Development Revisited

Leamer et al 1999

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
90

Land

Temporary Crops
E

Peasant Farming
A B C

Permanent Crops

Footwear Apparel Machinery

Political Economy
Engerman and Sokolov (1997)

Endowments

Relative Wages

Endowments

Political Institutions

Relative Wages

91

Political Economy
Engerman 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 Abundance

1990

Low

High

93

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?

94

End

95

optional extra material

96

Khandelwal cycling

97

Perspective: The World Does Not Stand Still

Khandelwal 2009

Quality Ladder

US

US China Vietnam Electronics China Vietnam Apparel

98

more on robots

99

Whither the United States?

(The Third Industrial Revolution Economist 2012.4.21)

The first industrial revolution began in Britain in the late 18th century, with the mechanisation of the textile industry. Tasks previously done laboriously by hand were brought together in a single cotton mill, and the factory was born. The second industrial revolution came in the early 20th century, when Henry Ford mastered the moving assembly line and ushered in the age of mass production. Now a third revolution is under way. Manufacturing is going digital Now a product can be designed on a computer and printed on a 3D printer In time, these amazing machines may be able to make almost anything, anywherefrom your garage to an African village.

100

U.S income inequality

101

U.S. Wages by Education Level

Source: Autor, Katz and Kearny (2007)

102

Steve Jobs vs Obama

103

Honest to a Fault
(How the US Lost Out on iPhone Work NYT 2012.1.22)

OBAMA: What would it take to make iPhones in the United States?

JOBS: Those jobs arent coming back. Companies like Apple say the challenge in setting up U.S. plants is finding a technical work force. In particular, companies say they need engineers with more than high school, but not necessarily a bachelors degree. Americans at that skill level are hard to find.
104

Honest to a Fault
(How the US Lost Out on iPhone Work NYT 2012.1.22)

OBAMA: What would it take to make iPhones in the United States?

JOBS: Those jobs arent coming back. Companies like Apple say the challenge in setting up U.S. plants is finding a technical work force. In particular, companies say they need engineers with more than high school, but not necessarily a bachelors degree. Americans at that skill level are hard to find.
105

quality variation in autos

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Tesla vs BYD

Tesla CEO comments on competition from BYD

(But, see this. Is Tesla as good as they think?)

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