new classical theories of international trade international trade dadoboeva f
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New Classical Theories of International Trade
International Trade
Dadoboeva F.
New Classical Theories of International Trade
Specific Factor Model
Factor Endowment Theory (H-O Model)
Other New Classical Theories
Leontief Paradox
Specific Factor Model
The specific factor model is to analyze the effect of a change in commodity price on the returns of factors in a country when at least one factor is not mobile between industries.It indicates that workers may be better or worse off,
depending on preferences;It predicts that owners of factors used in export
industries gain from trade, while owners of factors used in import-competing industries will lose from trade.
Specific Factor Model
specific factorIts use is specific to either the production of machines
or the production of cloth and cannot move between industries. Such as capital in the model.
mobile factorIt can move between machine production and cloth
production over time. Such as labor in the model.
Specific Factor Model
W1
W0
W1
W0
F
E
L L1
Wage Rate
Wage Rate
Total Labor Supply of the U.S.
DM
DM’DC
O O’
DM : the machine industry’s demand for labor.
DC : the cloth industry’s demand for labor
W0 : equilibrium wage, which occurs when OL labor is employed in the machine industry and O’L labor is employed in the cloth industry.
As the demand for labor in the machine industries increases, the wage rate rises and workers move from the cloth industries to the machine industries.
Specific Factor Model
The existence of specific factors can help explain why some groups resist free trade. In general, owners of the abundant factor of
production in a country should be in favor of free trade.
However, both capital and labor in the industry with a comparative disadvantage suffer losses and may well resist free trade.
Factor Endowment Theory (H-O Model)
The Ricardian principle of comparative advantage explains why specialization and trade lead to gains for producers and consumers.
It does not, however, in itself explain why the production possibilities frontiers (PPF) of different countries have different shapes, and thus why a country’s comparative advantage is in one product rather than another.
Factor Endowment Theory (H-O Model)
The factor-endowment theory states that comparative advantage is explained exclusively by differences in relative national supply conditions.
In particular, the theory highlights the role of countries’ resource endowments (such as labor and capital) as the key determinant of comparative advantage.
Factor Endowment Theory (H-O Model)
Assumptions Countries all have the same tastes and
preferences (the same indifference curves);They use factor inputs which are of uniform
quality;They all use the same technology.
Factor Endowment Theory (H-O Model)
14 20 6 18 300
15
21F
F’
H
G’
F
GG
ⅠtG
tF
t1
30
20
10
0Auto
Wheat
Auto
Wheat
II II
France’s PPF
Germany’s PPF
France’s PPF
Germany’s PPF
Factor Endowment Theory (H-O Model)
In summary, the factor endowment model asserts that the pattern of trade is explained by differentials in resource endowments. A capital abundant country will have a comparative
advantage in a capital-intensive product;While a labor abundant country will have a
comparative advantage in a labor-intensive product.
Factor Endowment Theory (H-O Model)
ImplicationsFactor price equalization
The shift within each country towards use of cheaper factors, and away from expensive ones, leads to more equal factor prices (if factors are mobile).
Distribution of incomeTrade changes domestic distribution of
income as demand for different factors changes.
Other New Classical Theories
Rybczynski Theorem It basically says that the way in which a country grows
has an impact on the production and trade mixes of the country. Countries with low savings rates that invest little in
new plants and equipment will tend to produce and trade labor-intensive goods.
Countries with high savings and investment rates will tend to produce and trade more capital-intensive goods.
Other New Classical Theories
T
S
ρρ
X0 X1
S0 S1
T0
T1
The Effect of an Increase in Country A’s Capital Stock
At constant world prices, if a country experiences an increase in the supply of one factor, it will produce more of the product whose production is intensive in that factor and less of the other product.
Other New Classical Theories
Factor Price Equalization TheoryFree international trade will lead to equalization
of in the returns to homogeneous or identical factors across.
The theory predicts that some factor payments will rise and others fall with the introduction of trade.
Other New Classical Theories
Given all the assumptions of the H-O model, free international trade will lead to the international equalization of individual factor prices. In countries that have high wages before trade
begins, there will be tendency for wages to fall. In countries with initially low wages, trade will
produce tendency for wages to rise. Under the strict assumptions of the H-O model,
these tendencies will continue until the equalization of wages is achieved. The same will be true for rental rates on capital.
Other New Classical Theories
Stolper-Samuelson TheoremFree international trade benefits the abundant factor and
harms the scarce factor.Wages initially high in Country A because labor is relatively
scarce and hence can exploit its scarcity power in the factor market.
International trade means manufacturers using scarce labor in Country A must now compete with manufacturers using more abundant labor in Country B.
International competitive pressures tend to force down wages in Country A.
Thus, even though labor is immobile between countries, its price is equalized through competitive bidding for its services.
Other New Classical Theories
Implications First, we now have established a reason for some
groups in a community to oppose in international trade.
Second, the Stolper-Samuelson theorem provides insights into why governments may impose barriers to trade.
Finally, it is important to remember that even though some interest groups lose from international trade, the country as a whole gains from international trade relative to autarky.
Other New Classical Theories
Explaining Wage Inequality
Labor RatioO
S0
1.5 2.0 2.5
S1S2
D0
D1
1.5
2.0
2.5
Wage Ratio
Other New Classical Theories
A shift in either the supply curve or demand curve of skilled workers available relative to unskilled workers will induce a change in the equilibrium wage ratio.
Factors can affect wage inequality.International trade and technological changeImmigrationEducation and training
Leontief Paradox
According to the H-O model ,the United States should export capital-intensive goods and import labor-intensive goods.
Leontief’s experiment found was exactly the opposite of the H-O model. According to Leontief’s experiment, U.S. exports tend to be labor intensive relative to U.S. imports.
Attempted Reconciliations of Leontief’s Findings.