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10 Cards in this Set
- Front
- Back
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Describe the Heckscher-Ohlin Model.
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Resources:
K- capital L-Labor LONG-RUN Model *= Foreign |
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What are the assumptions of the Heckscher-Ohlin Model (step-up)?
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1) Set up
-2X2X2 Model -2 countries: Home and Foreign -2 goods: Shoes and computers -2 factors: K, L |
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Describe the 2 factors.
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Home
L= Ls + Lc K= Ks+ Kc Foreign: L*= Ls* + Lc* K*= Ks* + Kc* |
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What are the assumptions of the Heckscher-Ohlin Model (non-set-up)?
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2)
Free factor mobility between sectors Implication: Ws=Wc= W rs= rc= r 3) Shoe production is labor intensive Computer production is capital intensive Ls/Ks > Lc/Kc 4) Home country is capital abundant Foreign country is labor abundant 5) Free trade in goods but no cross-border mobility of factors L, K are fixed for home L*, K* are fixed for foreign 6) Technologies of production used in both sectors are the same across countries 7) Consumer tastes (preferences) are the same across the 2 countries |
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Describe PPF for computers and shoes.
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X-axis= Qc
Y-axis= Qs HOME: Bowed out towards Qc (produces more computers) FOREIGN: Bowed out towards Qs (produces more shoes) |
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What happens to relative prices with trade?
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Computers:
The export good for HOME is computers. The price rises. The price falls for FOREIGN (import) Shoes: The export good for FOREIGN is shoes. The price rises. The price falls for HOME (import) |
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What is the Heckscher-Ohlin Theorem?
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2 goods and 2 factors. Each country specializes and trades the good that it uses intensively the factor production it has in abundance.
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Describe economy-wide demand for labor?
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Lbar/Kbar = (Ls+Lc)/Kbar = Ls/Kbar + Lc/Kbar=
Ls/Ks*(Ks/Kbar)+Lc/Kc*(Kc/Kbar) Ks/Kbar and Kc/Kbar are weights (how much labor is in each sector) n= equilibrium wage relative to rental rate |
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What is the Stolper–Samuelson theorem?
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In the long-run, when all factors are mobile, an increase in relative price of a good will increase the real earnings of the factor used intensively in production of that good and decrease the other factor.
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What is the Rybczynski theorem?
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In H.O. Model with 2 goods and 2 factors, an increase in the amount if one factor will increase the output of the industry that intensively uses that factor, and decrease the output of the other industry.
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