Title: Factor Proportions and the Structure of Trade: HOS-Krugman-DFS Model
1Factor Proportions and the Structure of Trade
HOS-Krugman-DFS Model
The HOS Model
The Explanation of International Trade
Differences across countries in relative
abundance of factors of production. Assumptions
Identical Technologies Identical Demand
Patterns
2Relative Factor Intensity
Full employment
Y
E
K constant
A
B
B
L constant
D
F
X
C
Structural Bias The Transformation Curve(
ABC) shifts asymmetrically with unbalanced
changes in K and L. A Rise in K, with no change
in L, leads to an increase(fall) in X (Y)).
3AT POINT F
1) Labor is unemployed W0. (2) The X-industry
is active The Y-industry is inactive.
Therefore
AT POINT A
1) Capital is unemployed R0. (2) Y-industry is
active X-industry is inactive. Therefore
4AT Point A (continue)
5At Point B
Relative Supply
6Two Countries H and F H is more capital
abundant. Hs Relative Supply is biased towards
X
7Free Trade and Autarkic Equilibria
3
2
1
2Free trade 1autarky in H 3autarky in F
8Full Employment Supply of X and Y
9The Heckscher-Ohlin Proposition 1 Any country
will export the good which makes intensive use
in its production of relative abundant factor
supply.
10Full Employment Factor Prices
11Income Distribution and International Trade
W
A
Industry X-Line
B
B
Industry Y-Line
C
D
R
ABCfactor price frontier
A rise in
(X is capital intensive) will raise R and
decrease W.
12The Heckscher-Ohlin Proposition 2(dual to
Proposition 1) Free trade causes an increase
in the factor price of the factor of production
which is used intensively in the export industry
and a fall in the factor price used intensively
in the import competing industry.
13Factor Price Equalization Failures
- Two ways to generate a failure of FPE
- Assume that factor proportions are sufficiently
different that they are outside the FPE set. - Introduce costs to international trade, which
could have strong effect on trade volume.
14Romalis (AER, March 2004, 94, No.1, 67-97)
- Generalizes a Heckscher-Ohlin model of
Dornbusch-Fischer-Samuelson framework, and
explains trade structure - Assumes a many-country version of the
Heckscher-Ohlin model - Integrates this with Krugman intra-industry
trade - Allows for transportation costs.
15The Model
- There are 2M countries, M each in the North and
South. - Southern variables are marked with an asterisk.
- There are two factors of production skilled and
unskilled labor. - The proportion of skilled labor is
- Northern countries are abundant in skilled labor
16Preferences
17Monopolistic Competition
Production of variety i
Number of of varieties in industry z
Number of countries
Sub-utility function
Dual Unit cost
Fixed cost
18Transportation costs
Units of a good must be shipped for 1 unit to
arrive in any other country
19Equilibrium in an industry
- Solve for the share of world production that each
country commands, conditional on relative
production costs. Countries with lower costs
capture larger market shares.
Consumer price
Ideal Price index
20National income and Spending
A constant fraction of income b(z) is spent on
industry z
21(No Transcript)
22World Demand
23North-South relative price
24If is low, (1) is the solutionif is high,
(2) is the solution
(1)
(2)
25General Equilibrium
26Special Case
- The Dornbusch-Fischer-Samuelson Model is a
special case with no transportation costs - Perfect competition
27Transport costs
- The addition of the transport costs leads a stark
structure of production and trade
Non-traded goods Produced In South
Skill intensity of industry (z)
Share of industry
Skill-intensive goods Produced In North
Non-traded goods Produced In North
Unskilled goods produced in south
28Producer prices
- pfactory-gate price domestically
Sold in M-1 markets abroad