HO model continued: StolperSamuelson theorem

1
HO model continuedStolper-Samuelson theorem

• Readings (All in reader)
• Ch5 Factor endowments and HO theory. Salvatore,
  D.
• (2) How far does trade with the third world
  endanger the jobs of low-skilled workers? The
  Economist 10/1/94, Vol. 333 Issue 7883
• (3) Economist 12/7/96, Vol.341 Issue 7995 Trade
  and Wages
• Additional
• (4) Nicoli Nattrass, 1998. Globalisation and the
  South African labour market, Trade and Industry
  Monitor, vol. 6.
• (5) Lawrence Edwards, 2000. Labour shedding
  output growth is trade the culprit? Trade and
  Industry Monitor , vol. 14.

2
Summary of FPE

• Schematic outline of Factor Price Equalization
  Theorem

3
FPE

• After trade
• Relative prices converge US prices of shoes
  fall with imports from SA
• SA prices of cars fall with imports from US

Pus
PWorld
PSA
4
FP Convergence

• Factor-Prices in SA (with unemployment?)
• Fall in demand for K Excess demand for L

r
SK
w
r0
r1
SL
w0
DK1
DL2
DK2
DL1
K
L
L1
L2
5
Stolper-Samuelson Theorem

• Question
• Who benefits from liberalisation and changes in
  prices?
• Stolper-Samuelson Theorem
• Free international trade benefits the abundant
  factor and harms the scarce factor
• Or
• A rise in the price of a good raises the returns
  to the factor used intensively in the production
  of that good, and reduces the return to the other
  factor

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Summary of S-S theorem

• Schematic outline of Stolper-Samuelson Theorem

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Stolper-Samuelson Theorem

• But are these real returns?
• EX in SA w increases, so welfare of workers who
  consume cars rise (as Pc falls), but what about
  those who consume shoes (Psh rises)?
• In perfect competition
• Price of the product is comprised strictly of
  payments to capital and labour
• Pgood cost of labour cost of capital
• Remember
• w MPLP r MPKP

8
Why does real return to abundant factor rise?
Lets look at SA
In response to rising w/r in SA, car and shoe
producers substitute labour for capital
Cars
Shoes
K
K
80 cars
L
L
Implication? K/L ratio rises in both sectors.
What effect does this have on MPL and MPK?
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Stolper-Samuelson Theorem

• Both industries in SA use after FPE relatively
  more capital than labour
• \ MPL MPK
• BUT from factor demand equation
• MPLShoes w/PShoes MPKShoes r/PShoes
• MPLcars w/Pcars MPKcars r/Pcars

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Stolper-Samuelson Theorem

• Remember PSh increased PC decreased
• MPLS w / PS MPKS r / PS
• MPLC w / PC MPKC r / PC
• Magnification effect in South Africa
• Dw gt DPshoes gt DPcars gt Dr
• Outcome real income of abundant factor increased

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HO model can also give insight into impact of
immigration on an economy
12
Rybczynski Theorem

• Rybczynski Theorem
• At constant world prices, if a country
  experiences an increase in the supply of one
  factor, it will produce more of the product
  intensive in that factor and less of the other

13
SA PPF and Biased Growth

• SA is labour abundant
• Impact of increase of labour force (allow child
  labour)

Cars
Pworld
Pworld
100
80
A
B
Shoes
500
700
14
Does Empirical evidence support the HO model?
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Limitations of HO predictions

• Problematic assumptions of HO
• Constant technology
• Demand reversal
• Factor intensity reversal
• Transportation cost
• Imperfect competition
• Immobile/production specific factors (SFM)
• These would impact on price ratio (Px/Py) and
  thus trade pattern

16
Leontief Paradox
USA (1947) relatively capital abundant compared
to trading partners. But Imports were Capital
intensive relative to exports! Paradox? Is the
HO theorem wrong?
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Paradox in SA?
SA is a middle income economy and may trade
differently with developing and developed
economies
Table Revealed relative factor endowments
Source IMF. 2000. South Africa Selected issues.
IMF staff country report No. 00/42.
1. SA is K abundant compared to high, medium and
low income countries. 2. SA is unskilled
abundant compared to high and medium Y
countries 3. SA is skill abundant compared to low
Y countries
18
Employment Flows from Trade, by Education (Bhorat
1999)
Figure Percentage increase in demand for labour
from trade, 1990-95

• Trade benefited less skilled during 70s and
  early 80s, but skilled during 90s

19
Leontief Paradox

• Possible explanations
• Demand reversal
• Empirically not supported
• Factor intensity reversal Perhaps the imports
  are produced using labour intensive techniques
  overseas?
• Tests show no real significance

20
Tarrif structure scarce factor lobbies for
protection?- Some relevance but does not fully
explain it
21
Leontief Paradox

• Possible explanations
• Labour not homogenous? There are different skill
  levels
• US exports skill-intensive products and imports
  unskill-intensive products
• Two-factor model to limited?
• Only labour-capital distinction too simplistic gt
  need multi-factor model which includes NATURAL
  RESOURCES

22
Explanations for Paradox in SA

• Capital is internationally mobile and therefore
  not a determinant of comparative advantage
  (Adrian Wood)
• History of State support for K intensive
  industries as part of the import substitution
  programme. State investment (IDC) still biased
  towards K-intensive sectors
• South Africa is a resource intensive economy and
  exports large quantities of K-intensive
  non-ferrous metals, iron steel, minerals.
• Export support under the General Export Incentive
  Scheme (between 1990-96) favoured K-intensive
  sectors.
• Import competition from L-abundant economies such
  as India and China.

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Readings for trade and labour workshop (in reader)

• QUESTION Use the HO model to explain rising wage
  inequality in developed economies in response to
  trade with developing economies
• How far does trade with the third world endanger
  the jobs of low-skilled workers? The Economist
  10/1/94, Vol. 333 Issue 7883
• Economist 12/7/96, Vol.341 Issue 7995 Trade and
  Wages
• Additional
• Nicoli Nattrass, 1998. Globalisation and the
  South African labour market, Trade and Industry
  Monitor, vol. 6.
• Lawrence Edwards, 2000. Labour shedding output
  growth is trade the culprit? Trade and Industry
  Monitor , vol. 14.