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20 Cards in this Set

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  • Back
Heckscher-Ohlin (H-O) Theory
A country’s factors of production (country’s endowments of inputs) used to make each good give rise to productivity differences between countries.
Factor abundance versus factor scarcity:
when a country enjoys a relative abundance of a factor, the factor’s relative cost is less than in countries where the factor is relatively scarce.
A country will export the commodity whose production requires the intensive use of the country’s relatively _______ (and therefore, cheap) factor and import the commodity whose production requires the intensive use of the country’s relatively ______ (and therefore, expensive) factor.
The Factor Price Equalization Theorem
International trade will bring about equalization in the relative and absolute returns to homogenous factors across countries.
In the H-O model of trade,
the pattern of trade is driven by relative factor abundance
The Stolper-Samuelson Theorem
an increase in the relative price of a commodity raises the return of the factor used intensively in its production.
Developed nations are assumed to be
capital abundant.
The conclusion of increase in income inequality in the developed countries holds only if:
The assumptions of the H-O theory holds.
This may or may not be the case.
The reason for the changes in income inequality is explained by the Stolper-Samuelson Theorem.
The H-O model assumes:
(1) multiple inputs—labor, capital, land; and (2) variations in the quality of inputs.
IN THE HO THEORY, what determines the comparative advantage?
supply of factors!
Effect of Foreign Trade on Prices of Factors of Production
Foreign trade acts as a substitute for international mobility of factors of production as far as its effect on factor prices is concerned. With perfect factor mobility across countries, labor will move from low wage to high wage country until wages in the two countries are equal, and capital will move from low interest to high interest country until interest rates in the two countries are equal. One result of foreign trade in goods and services is (under the restrictive assumptions of the Heckscher-Ohlin model) the equalization in prices of factors of production.
Stolper-Samuelson Theorem Assumptions:
Labor earns wages proportionate to its skill level.
Owners of capital earn profits.
Landowners earn rents.
The amount of income earned per unit of input depends on both the demand for inputs and the supply of inputs. (Demand for an input is derived demand.)
If an output is in high demand, its price is high and the inputs used to produce it receive higher returns.
The Stolper- Samuelson Theorem states that:
An increase in the price of a good raises the income earned by factors that are used intensively in its production.
Conversely, a fall in the price of a good lowers the income of the factors used intensively in its production.
Ultimately, the effect of trade opening on income distribution depends on:
the flexibility of the affected factors
Magnification Effect
Changes in the price of a commodity have a magnified impact on the incomes of factors of production used intensively in its production. If the price of a good increases (decreases), the percentage change in the income of the intensively used factor will increase (decrease) by a larger percentage.
Specific Factors Model
Specific Factors Theory is based on the observation that the ability of factors of production to move from one industry to another is more limited in the short-run than in the long-run. It is a variation, a special case, of the H-O Theory.
Specific factors model assumes that:
(1) land and capital are immobile and cannot migrate; and (2) labor is fully mobile and can migrate from one sector to another.
Product Cycle Model
focuses on the speed of technological change and life history of many manufactured items through periods of innovation, stabilization, and standardization
Intra-firm Trade Model:
allows for comparative advantage but incorporates industrial organization.
Ownership-Location-Internalization Theory (OLI)
A theory that examines the variables affecting foreign direct investment. According to the OLI Theory, the key determinants are Ownership, Location and Internalization.