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Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].
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lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9

Oct 17, 2020

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Page 1: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 2: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 3: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 4: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 5: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 6: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

∑ β ∑β

αα α

β

ε

ε ε

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 7: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

τ

τ

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 8: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

/α τ/α

α αε

π τ ε

π

π π

τ ε

τ

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 9: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

π π

τ ε

πτ ε

τ ε

τ ε

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 10: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

τ ε

τ ε

/ τ

τ ε

τ ε

τ ε

τ ε

τ ε

τ ε

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 11: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

/

α α α α

α α α α

α μ

α α α α

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 12: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 13: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 14: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

τ

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 15: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

π ε

π τε

π ε

τε

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 16: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

πDi

πIi

πXi

0

-fD-fX

-fI

(aDi)1-ε (aIij)1-ε a1-ε(aXij)1-ε

Figure by MIT OCW.

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 17: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

τε

ετ

ε

ε

θ /

θθ

θ ε

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 18: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

ε

τ εε

τ ε

τε

εε

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 19: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

ω

/ α βτ τ β β ε

β μ

βτ β β

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 20: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

ε

βτ β β

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 21: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 22: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

/

θ

∂ /∂

∂ /∂ /

∂ /∂ /

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 23: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

O

O*

L

K

K*

L*

wL/wK B’

E

H

Y

C

BX

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 24: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

/ /

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Page 25: lecture 14 - Massachusetts Institute of Technology · ?14%1@6?B$53DEB5C 1>4 .5G9<<KBCD49C3ECC, !'(%( " %,! (*" +( ,! &-%,"' ,"(' %3*& 3?>35>DB1D9?>?6@B?4E3D9?>9>E>9AE5<?31D9?>9C'(,@B?KD

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].