ECONOMICS 3150B Lecture 12 November 1, 2005

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ECONOMICS 3150BLecture 12November 1, 2005
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Heckscher-Ohlin Model

• 2X2X2 model
• Two countries
• 2 factors of production
• 2 products different factor intensities
• Identical production technologies and state of
  technology
• Different relative resource availabilities
  X1/X2A ? X1/X2B
• Basis for trade different resource
  availabilities which give rise to different
  pre-trade relative prices
• Comparative advantage interaction between
  relative abundance (supply) of resources (factors
  of production) and technology of production
  (relative intensity with which different factors
  of production used in production of different
  goods)

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Heckscher-Ohlin Model

• Factor intensity X1/X2i
• Min TC P(X1)X1 P(X2)X2
• s.t. 0Y1 F1(X1, X2, T)
• Factor intensity determined by intersection of
  isoquant and budget line
• Constant returns to scale and factor intensity
• Factor intensity X1/X21 depends upon
  P(X2)/P(X1)
• If P(X2)/P(X1) ? ? X1/X21 ?
• Relative prices of factors of production depend
  upon relative availabilities of factors of
  production
• If X1/X2A ? ? P(X2)/P(X1)A ?

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Heckscher-Ohlin Model

• Relative prices of products P1/P2 depend upon
  relative prices of factors of production PMC
  P(X1)/P(X2) and relative factor intensities
• Assume Y1 uses X1 relatively more intensively
  than Y2 ?
• X1/X21 gt X1/X22
• As P(X1)/P(X2) ? so too does P1/P2
• If X1/X2A gt X1/X2B then P(X1)/P(X2)A lt
  P(X1)/P(X2)B and P1/P2A lt P1/P2B
• A has comparative advantage in Y1 (Y1 uses X1
  relatively more intensively and A has relative
  abundance of X1)
• A will export Y1 and import Y2
• Specialization not necessary outcome even if one
  of the countries is a small country and the other
  is a large country
• Trade will tend to equalize relative prices of
  products and factors of production

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Heckscher-Ohlin Model

• Winners and losers
• Net utility/income gains
• Full employment and no transition costs
• ? D for Y1 post-trade ? ? D for X1 in A ?? P(X1)
  in A
• ? S of Y2 post-trade ? ? D for X2 in A ? ? P(X2)
  in A
• Welfare effects of changes in terms of trade
  P1/P2 for A
• Assume improvement in terms of trade for A
• Leads to improvement in aggregate welfare in A
  and increase in trade volumes
• Implications for income distribution between X1
  and X2
• ? D for X1 in A
• ? D for X2 in A

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Heckscher-Ohlin Model

• Increase in availability of factors of production
  in country A
• Proportionate increase in both factors of
  production ? no change in relative availabilities
• Increase in volume of trade
• Change in terms of trade ? deterioration because
  of ? S of Y1 from country A and ? D for Y2 from
  country A
• Increase in X1 (or disproportionate increase in
  X1)
• Biased growth
• Change in shape of PPF for country A ? change in
  relative prices, change in terms of trade
• Larger impacts on volume of trade and terms of
  trade
• Growth leads to more trade

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Heckscher-Ohlin Model

• Determinants of relative abundance of factors of
  production
• Natural resources including climate
• Exploration/development
• Climate change
• Labour
• Skill level
• Education, training
• Population growth, demographics
• Capital
• Types
• Investment
• Technology
• RD
• Production, products

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Tariffs

• Tax on imports (ad valorem vs. per unit)
• Increases the relative price of the imported good
  within a country in comparison to the
  international traded prices
• Relative prices in international market P1/P2
• Relative prices in country A (A imports Y2)
  P1/(1?)P2
• Ignores possible effects on terms of trade
• Reduces demand for Y2 ? if A a large country, P2
  decreases so part of tariff paid by foreign
  producers (improvement in terms of trade) if A
  small country, world prices unaffected, so tariff
  paid by domestic consumers
• Increase in D for X2 (factor used more
  intensively in production of Y2) in A ? ?
  production of Y2 in A and ? production of Y1
  (because of change in relative prices in A)
• Country B prefers to impose export tax (? )
  generates same effects on relative prices but
  revenues collected by foreign country

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Export Subsidy

• Negative tax on exports (ad valorem vs. per unit)
• Decreases the relative cost of the exported good
• Relative prices in international market P1/P2
  ? if unchanged, ? profits in production of export
  product (Y1 for country A)
• Relative prices facing exporters in country A
  P1(1?)/P2
• Ignores possible effects on terms of trade
• Increases S of Y1 ? if A a large country, P1
  decreases so importers in country B benefit
  (decline in terms of trade) if A small country,
  world prices unaffected
• Increase in D for X1 (factor used more
  intensively in production of Y1) in A ? ?
  production of Y1 in A and ? production of Y2
  (because of change in relative prices in A)
• Distortions created by need to raise tax revenues
  tax systems creates distortions in
  decision-making and consumes resources ? lowers
  PPF in A (efficiency losses)

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Export Subsidy

• Regional Jets (RJs) Canada vs. Brazil
• Why has Canada attacked Brazils subsidization
  of Embraer and production of RJs?
• Canada an exporter, not an importer
• Deterioration in terms of trade
• Regional income effects since Bombardier a
  Quebec-based company
• Why does Brazil provide export subsidies which
  reduce relative prices of RJs?
• Create a comparative/competitive advantage
• Economic development productivity growth
• Technology
• Learning curves
• Economies of scale
• Clusters agglomeration effects

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New Trade Theory

• Economies of Scale
• External economies of scale clustering effects
• Productivity levels within each firm depends on
  size of industry min. AC depends upon size of
  industry
• Compatible with perfect competition
• Internal economies of scale production,
  distribution, RD
• Productivity levels within each firm depends upon
  size of each firm
• Economies of scale stem from selection of
  production technology
• Information re. available technologies
• RD to generate new technologies
• Not compatible with perfect competition

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Economies of Scale Imperfect Competition

• Internal economies of scale
• Natural monopoly case
• Pricing P gt MC
• X-inefficiency ? incentives for senior management
• Oligopoly case
• Minimum efficient scale of operations (MES)
• Interaction between size of market and MES
  determines number of firms
• P gt MC

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Models of Imperfect Competition

• Profit Maximization
• Monopoly
• Oligopoly -- interdependence
• Cournot model output competition ? P gt MC
• Bertrand model price competition ? P MC
• Prisoners dilemma ? P MC
• Repeated version of P.D.
• Fixed endpoint ? P MC
• Indefinite endpoint ? P gt MC

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Prisoners Dilemma

• Classic Model