Introduction Autarkic economy Comparative statics Specific factor endowments and trade I (Part A) Robert Stehrer The Vienna Institute for International Economic Studies - wiiw April 9, 2014 Robert Stehrer Specific factor endowments and trade I (Part A)
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Specific factor endowments and trade I (Part A) fileIntroduction Autarkic economy Comparative statics Introduction 1 Ricardo model assumed only one factor of production (labour) 2
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IntroductionAutarkic economy
Comparative statics
Specific factor endowments and trade I (Part A)
Robert Stehrer
The Vienna Institute for International Economic Studies - wiiw
April 9, 2014
Robert Stehrer Specific factor endowments and trade I (Part A)
IntroductionAutarkic economy
Comparative statics
Introduction
1 Ricardo model assumed only one factor of production (labour)
2 Other factors: land, capital, etc.
3 Allows discussion if gains from trade are unevenly distributed, or ifeven their are loosers
4 2 and more factor models:1 Specific factors model (Ricardo-Viner model)2 Heckscher-Ohlin model (discussed later)
Robert Stehrer Specific factor endowments and trade I (Part A)
Production of ∆x1 more output in industry 1 requires additional labour input in this industryof ∆l1 ≈ al1∆x1. Being at the PPF this additionally required labour in sector 1 is onlyavailable when reducing production and therefore labour demand in sector 2, i.e. ∆l2 ≈al2∆x2. As ∆l1 = −∆l2 one gets
al1∆x1 = −al2∆x2 ⇔∆x2
∆x1
≈ −al1
al2
The more of x1 is already produced, the more labourers are needed to produce an additionalunit of good 1 (due to the declining marginal productivity of labour). Therefore, the moreof good 2 has to be foregone, to provide the additional workers for producing the additionalunit of good 1. Thus, the MRT is increasing (in absolute terms) the larger is x1 (the slopebecomes steeper).
The MRT is interpreted as the
opportunity costs of good 1 in terms of good 2
Robert Stehrer Specific factor endowments and trade I (Part A)