Chapter Who Gains from Trade Also do Appendix B

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Chapter 5. Who Gains from Trade

Also do Appendix B.

(2 days)


Figure 5.1 page 71. How free trade affects income distribution

Short run versus long run. In short run, factors are tied to their current production.

Main point is that prices of labor and land move the same in all industries, in longer run.

Talks through to factor price equalization.

Figure 5.2 page 72. Effects of Free Trade: Short run versus Long Run

In the “Extension” page 73, there is a conversation about how Land/Labor ratios change. Not so important.

Three implications of H-O Theory:

Stolper Samuelson theorem. An event that changes product prices will raise the return to the factor used intensively in the rising price industry, and lower it for the other factor.

Specialized Factor Pattern: The more a factor is specialized, the more it stands to gain (or lose) from the change in the product price.

Factor price equalization theorem. Free trade equalizes not only product prices, but also factor prices.

Stolper and Samuelson in AA, ~1990

Figure 5.3 page 77. Shares of the world’s factor endowments, early 2000s.

Does Heckscher-Ohln explain actual trade patterns?

Mentions Leontieff’s paradox (p. 78).

1947 U.S. exported labor intensive goods. (K/Lx)/(K/Lim) =.77 <1.

Resolution: U.S. exports land intensive, and skilled labor intensive goods.

Why does this finding make a difference?

Predict who will benefit, who will lose with trade.

Helps our theories

Explanations for reverse finding:

No free trade

No full employment

Theory not capable of picking up dynamic factors

Technological and other explanations of comparative adv. & trade flows.

Canada trade: with U.S. had been controlled by auto pact, CUSFTA?

Figure 5.4 page 80. U.S. trade: consistent with H-O Theory? Insert graph on world trade, inconsistent with H-O theory. Somewhat better than a coin flip.

Why not? No free trade.

Figure 5.5 page 84. Schematic view of Factor content of U.S. exports

Comment about how cutting imports hurts exports and other production.


Some exports use imported components

Foreigners can’t buy as much from us


Pressure on exchange rates.

Argues that this is a one-to-one proposition.

Comments that U.S. protectionism is quite specific, targeting labor intensive activities, especially low skill.

Figure 5.6 page 85. Factor content of Canada’s exports

Patterns in other countries.

Do factor prices equalize internationally? No.

Perhaps a weaker form: movement towards… yes. Pre-WWI, Asian NICs.

China: Value of Exports and Imports, 1976-2003 p. 83

China’s Exports and Imports, p. 82

Williamson Wage rent and Land rent

Bade Parkin on Convergence

Sala I Martin on world income inequality QJE 2006.

Gini Coefficient on Global Inequality

Sala I Martin

Suggested reading in Chapter 5.
New edition doesn’t mention Stern.

Names from UM-Ann Arbor campus;

Deardorff, Levinsohn (now at Yale), Leamer at UCLA


Figure B.1 page 666. Production Functions with Fixed Factor Proportions

Figures B.2 and B.3 Both figures together (PPCurves) p. 667

Figure B.3 Page 641
Production Possibility Curve, Fixed Factor Proportions

Figures B.2 and B.3 (p. 641) Both figures together (PPCurves)

Figure B.4p. 642 PPC Curve with constant opportunity costs

Figure b.4 p. 642. PPC with constant opportunity costs.

Figure B.5 page 643. Variable factor proportions

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