Factor Proportions and the Structure of Trade: HOS-Krugman-DFS Model - PowerPoint PPT Presentation

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Factor Proportions and the Structure of Trade: HOS-Krugman-DFS Model

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Title: Factor Proportions and the Structure of Trade: HOS-Krugman-DFS Model


1
Factor 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
2
Relative 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)).
3
AT 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
4
AT Point A (continue)
5
At Point B
Relative Supply
6
Two Countries H and F H is more capital
abundant. Hs Relative Supply is biased towards
X
7
Free Trade and Autarkic Equilibria
3
2
1
2Free trade 1autarky in H 3autarky in F
8
Full Employment Supply of X and Y
9
The Heckscher-Ohlin Proposition 1 Any country
will export the good which makes intensive use
in its production of relative abundant factor
supply.
10
Full Employment Factor Prices
11
Income 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.
12
The 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.
13
Factor 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.

14
Romalis (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.

15
The 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

16
Preferences
17
Monopolistic Competition
Production of variety i
Number of of varieties in industry z
Number of countries
Sub-utility function
Dual Unit cost
Fixed cost
18
Transportation costs
Units of a good must be shipped for 1 unit to
arrive in any other country
19
Equilibrium 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
20
National income and Spending
A constant fraction of income b(z) is spent on
industry z
21
(No Transcript)
22
World Demand
23
North-South relative price
24
If is low, (1) is the solutionif is high,
(2) is the solution
(1)
(2)
25
General Equilibrium
26
Special Case
  • The Dornbusch-Fischer-Samuelson Model is a
    special case with no transportation costs
  • Perfect competition

27
Transport 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
28
Producer prices
  • pfactory-gate price domestically

Sold in M-1 markets abroad
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