Relationship between international factors movement and international trade

1
Relationship between international factors
movement and international trade
2
Substitution

• Assume labor moves from china into U.S.
• After the immigration, China will produce less
  labor-intensive products while the US will
  produce more labor-intensive commodities.
• This implies that international trade between the
  two countries will shrink.

3
Mundell (1959,AER) Model

• Assumptions
• 2 by 2 model
• Produce steel and cotton
• China is labor abundant but small country
• US is capital abundant and large country
• Identical technology
• Factors are perfectly mobile between the two
  countries.

4

• Assume factors are perfectly immobile first, but
  we allow free trade.
• If China imposes a high import tariff on steel,
  then what happens to the interest rate which is
  the return on the capital?

5
china

• C
  p
• P
• 
  D
• 
  Y

6
Recall Stolper-Samuleson Theorem

• An increase of the relative price of a commodity
  will increase the real return of the factor used
  intensively in that product.
• Price of steel up? r up
• An increase of price of the steel? steel
  production raises? require more capital? excess
  demand exists? pushes up capital price.

7

• Rch gt Rus
• Capital flows into China
• Chinas PPF outshifts
• Capital outflow does not affect USs MPK.
• Eventually, Chinas MPK should equal USs MPK
• Chinas final relative price ratio should be
  identical to its original price ratio.

8

• Production in China increases, but welfare is
  still the same since we have to pay the interest
  to the foreign country.
• Hence, they exist a substitute relationship
  between factor movement and international trade.
• Markuson (1983) international factor movement
  and trade are complement instead of substitution
  by assuming heterogeneous technology across
  countries !