Chapter Five Who Gains and Who Loses from Trade ? ?????????

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Chapter FiveWho Gains and Who Loses from Trade
? ?????????
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• 5.1 Introduction
• Chapter Objective
• To understand the effects of international trade
  on the welfare of different factor owners, and
  the effectiveness of the H-O theory.

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• The short- and long-run
• effects
• The short-run effect
• The Long-run effect

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Contents

• The Stolper-Samuelson theorem
• The factor price equalization theorem
• The specific-factor model
• The Leontief Paradox

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5.2 The Stolper-Samuelson Theorem ???? -
??????

• Long-run effects of trade on factor prices

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Wolfgang Stolper Paul Samuelson Ann Arbor, MI,
November 1991
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How Does Trade Affect Factor Price

• Opening trade
• Change in outputs
• Change in demand for inputs
• Change in factor prices

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Trade and Factor Price ( Labor-Abundant Country A
)
wA
rA
LA
KA
r0
w2
DL1
r2
DK0
DL2
DK2
w0
DK1
DL0
O LA L
O KA K
(a) Labor Market
(b) Capital Market
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Magnification Effect ????
PX aLX w aKX r
PY aLY w aKY r
(Assumption Input coefficients dont change)
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• The Stolper-Samuelson Theorem

A change in the price of a good changes, in the
same direction but more than proportionally, the
price of the factors used intensively in the
goods production.
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• Effects of Trade on
• Real Factor Prices

• Labor-Abundant Country A
• Factor Prices w r
• Purchasing Power w r
• Capital-Abundant Country B
• Factor Prices w r
• Purchasing Power w r

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• Trade Policy Implications
• To enjoy overall gains from trade, the
  government of a trading nation should consider
  compensation for the losers.

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5.3 The Factor Price Equalization Theorem
(Samuelson, 1948) ?????????

• Labor-abundant Country A
• Wage
• Rental Rate
• Capital-abundant Country B
• Wage
• Rental Rate

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• The Factor Price Equalization Theorem
• Under the assumptions of the H-O theory, free
  trade equalizes the prices of the same factor
  between the two countries.

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• An Alternate View

Trade in outputs and trade in factors of
production are substitutes. Robert
Mundell ?????? Nobelist 1999 Columbia Univ.
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Do Factor Prices Equalize Internationally ?

• There is a tendency toward equalization.

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5.4 The Specific Factors Model ??????
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• Reasons for Short-Run
• Factor Immobility

• Capital
• Labor

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• Effects of Short-Run
• Factor Immobility

• Country A
• Products (Industries)
• Shoe
• Computer
• Factors of Production
• Labor (L)
• Shoe Capital (SK)
• Computer Capital (CK)

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When capital is immobile in the short-run, what
are the effects of trade for the labor-abundant
country ?
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Labor-abundant Country A PShoe
PComputer What will happen to factor prices? w ?
rS ? rC ?
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Marginal Product (MP) ???? Value of Marginal
Product (VMP) ???? VMPL MPL P VMPK MPK
P Factor Price VMP
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Change in wage level Uncertain
wS
wC
wS2
wC2
wS0
wC0
VMPLS1
VMPLS0
VMPLC1
VMPLC0
OS L0 L1
OC
LA
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Workers purchasing power depends on the
combination of shoes and computers they
consume. w/PS w/PC
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Change in rental rate
SKA
rS
CKA
rC
rS2
rS1
rC0
VMPSK2
VMPSK1
rS0
rC1
VMPCK0
rC2
VMPCK1
VMPSK0
VMPCK2
O SK
O CK
(a) Shoe Capital
(b) Computer Capital
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Capital Owners Purchasing Power

• Shoe Capital
• rS /PS rS /PC
• Computer Capital
• rC /PS rC /PC

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5.5 Does H-O Explain Actual Trade
Patterns ?
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Shares of the Worlds Factor Endowments, Late
1990s
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• The Leontief Tests

???? Wassily Leontief 1906-1999
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The Leontief Paradox ??????

Import Exports
Substitutes Capital 2550780
3091339 (1947) Labor
182 170 (person-years) Capital-Labor
Ratio 14015 18184 ( per person-year)
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Explanations for the Paradox

• The Role of Tastes

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• Classification of Inputs

• Arable farmland
• Raw materials (Natural resources)
• Human capital
• Man-made capital
• Unskilled labor

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Human capital Export (1 bln )
D.B.Keesing 1966
? ?/ ????
?????? ?? ?/? I
II III IV V VI
VII VIII

U.S. 48194 5.02 2.89
2.74 4.85 8.38 14.96 15.73 45.42
U.K. 49833 3.77 2.29
2.36 4.79 7.20 15.01 14.91 49.68
Germany 50495 3.89 2.48 2.33
4.69 8.44 15.84 14.54 47.79 Japan
57842 2.48 1.66 1.78 3.96
4.56 15.15 12.04 58.38 Hongkong
74304 0.69 0.49 1.13 3.75 1.34
8.48 10.39 73.73 India
66517 0.71 0.58 1.06 3.47 1.33
11.13 9.62 72.09 I. Scientists and
Engineers V. Machinists,
Electricians and toolmakers II. Technicians
and Draftsmen VI. Other Skilled Manual
Workers III. Other Professionals
VII. Clerical Workers IV. Managers
VIII. Unskilled
and Semiskilled Workers
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• The role of trade barriers

• Factor Intensity Reversal
• ???????

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Summary 1. The Stolper-Samelson
Theorem 2. The Factor Price Equalization
Theorem 3. The Specific-Factor Model 4. The
Leontief Paradox