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Chapter 5. Who Gains from Trade
Also do Appendix B.
(2 days)
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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.
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Stolper and Samuelson in AA, ~1990
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Figure 5.3 page 77. Shares of the world’s factor endowments, early 2000s.
Does Heckscher-Ohln explain actual trade patterns?
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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?
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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.
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Figure 5.5 page 84. Schematic view of Factor content of U.S. exports
Comment about how cutting imports hurts exports and other production.
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Why?
Some exports use imported components
Foreigners can’t buy as much from us
Retaliation
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.
Appendix
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Figure B.1 page 666. Production Functions with Fixed Factor Proportions
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Figures B.2 and B.3 Both figures together (PPCurves) p. 667
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Figure B.3 Page 641
Production Possibility Curve, Fixed Factor Proportions
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Figures B.2 and B.3 (p. 641) Both figures together (PPCurves)
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Figure B.4p. 642 PPC Curve with constant opportunity costs
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Figure b.4 p. 642. PPC with constant opportunity costs.
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Figure B.5 page 643. Variable factor proportions
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