Within a country
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Transcript Within a country
Chapter 5: Who Gains and
Who Loses from Trade?
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Within a country
SR effects of opening trade
The US - exports wheat (price of wheat increases
compared to pre-trade levels)
US winners: landlords in wheat production,
farm workers
US losers:
cloth workers,
landlords in cotton
wheat
ROW – exports cloth (price increases)
ROW winners: cloth workers, landlords in cotton and wool
production
ROW losers: landlords in wheat production, wheat farm
workers
5-2
LR factor-price response – factors move between
sectors in search of higher returns (income gaps in
SR)
In the US…
Some US cloth workers will find jobs in wheat
production
Wages in wheat production will decline after the SR
increase (how much?)
Wages in cloth production will increase after the initial
decrease
Some land will be used for wheat instead of cotton and
wool
Rents on land used for wheat will decline after the initial
increase
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Will wages and rents go back to their pre-trade
levels after the LR adjustment?
No!
LR winners: US landowners and foreign workers
The price of land stays above pre-trade levels in US
The price of labour remains above pre-trade levels in
ROW
LR losers: US workers and foreign landowners
Reason: wheat is more land intensive and cloth
is more labour intensive
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Implications of the H-O theory
The Stolper-Samuelson Theorem
Trade changes product prices – wheat has a higher
relative price than pre-trade in US
Real return to the factor used intensively in the risingprice industry rises (land in wheat production in the
US)
The real return to the factor used intensely in the
falling-price industry falls (labour in cloth production
in the US)
This does not depend on how much of each product
5-7
The specialized-factor pattern
The more a factor is specialized, or concentrated, in
the production of a product whose relative price is
rising, the more this factor stands to gain from a
change in the product price
The more a factor is concentrated into the
production of a product whose relative price is
falling, the more it stands to lose from the change in
the product price
5-8
The factor price equalization theorem
With time not only product prices equalize, but also
factor prices (even if factors don’t move across
countries)
Workers earn the same wage rate in both countries
Pre-trade wages in US are higher due to scarcity
After trade wages decline
Pre-trade wages are lower in ROW (abundant)
After-trade wages are higher (cloth-export)
Land earns the same return in both countries
5-9
International Factor Price Equalization
With the shift to free trade: For each factor, its rate of return
becomes more similar between countries. Under ideal conditions,
its real rate of return is the same in different countries.
Example: Labor.
With no trade, the wage rate is high in the labor-scarce country.
The wage rate is low in the labor-abundant country.
With free trade, the import of labor-intensive products pushes
the wage-rate down in the labor-scarce country. The export of
labor-intensive products pulls the wage rate up in the laborabundant country.
5-10
H-O and actual trade patterns
Factor endowments see table
International trade – see table
5-11
Figure 5.3 - Shares of the World’s
Factor Endowments, Early 2000s
5-12
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Export-oriented and importcompeting factors
The US pattern – see table
The Canadian pattern –see table
5-14
Factor Content of U.S. Exports and
Competing Imports
5-15
Canada’s Exports and Competing
Imports
5-16
Do factor prices equalize
internationally??
The strong form of theorem is subject to many
assumptions and conditions
A weak form of the theorem – tendency of
factor prices towards equalization
5-17
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International Factor Price
Equalization
With the shift to free trade: For each factor, its rate of
return becomes more similar between countries. Under
ideal conditions, its real rate of return is the same in
different countries.
Example: Labor.
With no trade, the wage rate is high in the laborscarce country. The wage rate is low in the laborabundant country.
With free trade, the import of labor-intensive
products pushes the wage rate down in the laborscarce country. The export of labor-intensive
products pulls the wage rate up in the laborabundant country.
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