Trade effects of factor rewards: Trade effects of factor rewards Econ 303
International Economics
Prof. Carlos A. Benito
Who gains and who loses from Trade: Who gains and who loses from Trade Conceptual frameworks (models)
Hechscher-Ohlin
Stolper-Samuelson Theorem
Topics
Trade effects on factor incomes
Short run
Long run
Specialized factor patterns
Factor-price equalization across nations
International trade pattern : International trade pattern D S D S Bushels/yard Cloth United States Rest of the World X M International Market Cloth Cloth Bushels/yard Bushels/yard Factors: Land abundant
Industry: Land intensive Labor abundant
Labor intensive
Slide4: D S Wheat Wheat United States: Adjustments in Wheat Industry – Short Run Yard/bushels Wheat 45o Wheat Land Land Wheat Rent Ls Ld Labor Wheat Wheat Market Labor Market Land Market Nd Ns wages
Slide5: D S Cloth Cloth United States: Adjustments in Cloth Industry – Short Run Bushels/yard Cloth 45o Cloth Labor Labor Cloth Wages Ns Nd Land Cloth Cloth Market Labor Market Cloth Rent Ls Ld
Effect of free trade on factor rewards: Effect of free trade on factor rewards In Wheat In the US In the Rest of the World On Landowners On Laborers On Landowners On Laborers In Cloth + + + + - - - - Short run gain or lose Long run gain or lose Land rent wages Land rent wages
Stolper-Samuelson Theorem: Stolper-Samuelson Theorem If the price of one commodity rises and the price of the other remain constant, and after full adjustment to long run equilibrium:
It raises the real return to the factor used intensively in the rising price industry
It lowers the real return to the factor used intensively in the falling price industry
Stolper-Samuelson Theorem: Stolper-Samuelson Theorem Under perfect competition & constant marginal cost
Land is used intensively in wheat
Labor is used intensively in cloth
Pwheat= marginal cost of wheat = ar +bw
Pcloth= marginal cost of cloth = cr +dw
dPwheat > 0 dPcloth = 0
dr > 0 dw< 0