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Globalization, Growth, and Trade

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Globalization, Growth, and Trade Lectures 13-14: Specific Factors Model (SFM) * – PowerPoint PPT presentation

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Title: Globalization, Growth, and Trade


1
Globalization, Growth, and Trade
  • Lectures 13-14
  • Specific Factors Model (SFM)

2
Overview - Today
  • Motivation Bringing structure of economy into
    trade discussion, a quick look at global export
    shares and comparative advantage
  • Overview of the Specific Factors Model (SFM)
  • Analytical pieces of the SFM
  • Production function
  • Production possibility frontier
  • Production function and implied factor returns
  • 4 quadrant model (labor, 2 production functions,
    possibility frontier)
  • Trade, production and factor payments in the SFM
  • Analysis winners and losers from global market
    shocks

3
Regional export shares by sector
4
Primary product export shares
  • Latin Am 50 avg., but 85 for Andean countries
  • 60 of Mercosur inc. Bolivia and Chile
  • Over 65 Argentina, Belize, Bolivia, Chile,
    Colombia, Nicaragua, Panama, Paraguay, Peru,
    Uruguay, Venezuela
  • Under 40 - Costa Rica and Mexico
  • Comparative advantage of most of LA is clear
  • S.S. Africa most countries are mainly primary
    exporters
  • 4 countries with lt70 (Togo, Senegal, South
    Africa, Mauritius)
  • 6 with 70-80 share (Guinea, Kenya, Madagascar,
    Niger, Zambia, Zimbabwe)
  • The other 25 have gt 80 primary export share

5
Comparative Advantage Comparisons
  • If export shares gt comp advantage, then most of
    L Am Africa have comparative advantage in
    primary products.
  • What implications might this have for
    development?
  • Why does it matter to poverty?
  • Recall that Yh wLh rKh how would expanding
    primary products shape household incomes? What
    does your answer depend on?
  • Why might you be concerned about the poverty
    implications of comparative advantage in primary
    products versus manufacturing?
  • We can get more on this once we dig further into
    our next trade model

6
Political economy implications
  • HO-SS predicts aggregate gains from trade, but
    also losses for some groups
  • --gt Functional (self-interest) basis for some
    positions on trade
  • Owners of abundant factors in favor
  • Owners of scarce factors opposed
  • Examples?

7
Overview of Specific Factors Model (SFM)
  • 2 good model (like H-O)
  • But capital (or natural resource) is specific to
    sectors (cannot be moved to other sector)
  • Does this make sense?
  • Can a coffee farm become a clothing factory in
    short term?
  • In long term?
  • In SFM, only labor is mobile between sectors
  • Use SFM to study how changes in trade patterns,
    FDI, and technology affect economic structure and
    incomes when factor-specificity limits adjustment
  • Helps us to see winners and losers from trade in
    a slightly different way.

8
Production function 1 sector
  • Factors of production
  • Production function
  • Diminishing returns
  • VMP and factor payments

9
Production Function
Rice (tons)
ƒx(L, K)
28 27 25 20
Labor days
0 10 20 30 40
Constant returns to scale in (L,K), so dim.
returns to L when quantity of K is fixed
10
Production Function (more K -gt more rice)
ƒx(L, K)
Rice (tons)
ƒx(L, K)
28 27 25 20
Labor days
0 10 20 30 40
Constant returns to scale in (L,K), so dim.
returns to L when quantity of K is fixed
(irrigated paddy)
9
11
Calculating Factor Returns
X (w/px)Lx px
X X0 0
slope w/px
ƒx(K,L)
Revenue costs Xpx wLx rxKx
px
or X (w/px)Lx px where px
(rx/px)Kx
Lx0 Lx
Assume wage value of labors marginal
product Return on labor ( wage) slope of
tangent to function Return on stock of
sector-specific capital is height 0px (rx/px)Kx
12
(Derivation of factor returns)
  • Total revenue of the firm pxX wL rxKx
  • By assumption, the value of output is fully
    divided between workers and capital owners
  • Dividing both sides by px
  • X (w/px)L (r/px)Kx
  • (w/px)L px
  • Note w/px is known as the product wage in sector
    X
  • Distribution between L and K X (w/px)L
    px
  • Higher wage (steeper slope on w/px) implies lower
    profit share. Flatter slope implies higher
    profit share

13
The specific factors model
  • Assume 2 goods, X and M
  • Each sector uses specific capital, Kx, Km --gt
    prodn fns yj ƒj(L, Kj), j X, M
  • Labor is mobile (can be reallocated) between X
    and M production
  • Total labor force is fixed and fully employed
    L Lx Lm
  • In equilibrium, same wage offered in both sectors
  • For given Kx and Km, when labor is fully
    employed, can only increase output (create jobs)
    in one industry by reducing output (destroying
    jobs) in the other

14
General Equilibrium Supply Side
Production function M
M
Prodn Poss. Frontier, Maps total production
possible given PFs and labor
ƒm(Lm,Km)
0
X
L 50
Production function x
ƒx(Lx,Kx)
Labor constraint
45o
50 L
15
Autarky (no trade)
M

uA
MA
pA


XA
Lm
0
X
L

Lx
LA
45o
L
16
From Autarky to Trade
p gt pA

M
uT
MT lt MA LMT lt LMA uT uA LT LA

uA
MA
pA

MT
p




XA
Lm
0
XT
X
L

Lx
LA

LT
L
17
Trade, income, distribution in SFM
  • Integration with world economy raises aggregate
    real income cons. welfare
  • Structure of production and labor allocation
    change in predictable ways
  • What happens to returns to specific factors?
    (hint Stolper-Samuelson - see notes from Week 1)
  • What happens to the real wage?

18
Aggregate Income
M
uT
uA
pA
pT
0
YA
YT
X
L
LA
Compare old and new incomes at constant prices!
LT
45o
L
19
(Aggregate income change)
  • YT aggregate income from production of the
    combination (XT, MT) valued at world prices pT,
    measured in terms of good X (the value of X that
    could be bought with that much income)
  • Compare YA aggregate income from production of
    the combination (XA, MA), valued at world prices
    pT, measured in terms of good X
  • YT gt YA says the economy is better off in
    aggregate

20
Changes in factor payments
(w/pM)T
M
pA
slope (w/pM)A
pT
0
X
L
LA
LT
45o
L
21
(Changes in factor payments)
  • Moving from autarky to trade raises X output and
    employment, lowers M output and employment
  • Demand for KX rises pXT gt pXA
  • Demand for KM falls pMT gt pMA
  • Demand for L in M falls with KM fixed , law of
    diminishing returns says that productivity of
    remaining workers rises, so (w/pM)A lt (w/pM)T
  • Demand for L in X rises with KX fixed, (w/pX)A
    gt (w/pX)T
  • Are workers better off or worse off?

22
Comparative Advantage in Agriculture
Capitalists (Km) Landowners (Kx) Workers (L)
Effect of rise in px on nominal inc.
Effect of rise in px on real inc.
(a) When consume mostly X
(b) When consume mostly M
23
Comparative Advantage in Agriculture
Capitalists (Km) Landowners (Kx) Workers (L)
Effect of rise in px on nominal inc. lose gain gain
Effect of rise in px on real inc.
(a) When consume mostly X lose gain lose?
(b) When consume mostly M lose gain gain?
24
Comparative Advantage in Manufacturing
Capitalists (Kx) Landowners (Km) Workers (L)
Effect of rise in px on nom. income
Effect of rise in px on real inc.
(a) When consume mostly X
(b) When consume mostly M
25
Comparative Advantage in Manufacturing
Capitalists (Kx) Landowners (Km) Workers (L)
Effect of rise in px on nom. income gain lose gain
Effect of rise in px on real inc.
(a) When consume mostly X gain lose lose?
(b) When consume mostly M gain lose gain?
26
Distributional poverty effects
  • Real specific factor returns follow own prices
    for a rise in px/pm, px will rise, pm will fall
  • Real wage change is indeterminate
  • Wage rises rel. to pm, but falls rel. to px
  • Hhold welfare aggregate has risen, but
  • Gains for owners of capital in X
  • Losses for owners of capital in M
  • Workers welfare change is ambiguous

27
Discussion
  • If we have data on asset ownership cons.
    patterns, can compute changes in Rh and poverty
    for groups
  • Poverty effects depend on distribution of assets
    as well as on changes in payments such as wages
    and rents
  • Notice that we have assumed labor is mobile
    between sectors. Realistic? What if it is not?
  • SFM vs H-O which is more realistic? When?
  • What about more complex models, for example with
    some endogenous product prices (nontradables?)
  • See next class
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