maam dungca chap 5

Production Possibilities

_____ are influenced by both capital and labor:

             Akc Qc+ Akf Qf ≤ K

Production Possibilities

• With more than one factor of production, the opportunity cost is no longer constant and the PP

• When the economy devotes more resources towards production of one good, the marginal productivity of those resources tends to be low so that the opportunity cost is highF is no longer a straight line.

Rybczynski theorem

• If a factor of production increases, then the supply of the good that uses this factor relatively intensively increases and the supply of the other good decreases.

• isovalue line

• An ____ is a line representing a constant value of production, V.

V = PC QC + PF QF

Where:
PC and PF are the prices of cloth and food.

• Heckscher-Ohlin model

• Like the Ricardian model, the ___ predicts a convergence of relative prices with trade

Heckscher-Ohlin theorem

> An economy has a comparative advantage in producing, and thus will export, goods that are relatively intensive in using its relatively abundant factors of production

- and will import goods that are relatively intensive in using its

relatively scarce factors of production

Stolper-Samuelson theorem

• If the relative price of a good increases, then the real wage or rental rate of the factor used intensively in the production of that good increases, while the real wage or rental rate of the other factor decreases

• Any change in the relative price of goods alters the distribution of income

• Heckscher-Ohlin model

• Unlike the Ricardian model, the ___ predicts that factor prices will be equalized among countries that trade

• Free trade equalizes relative output prices

• Due to the connection between output prices and factor prices, factor prices are also equalized

• not

• In the real world, factor prices are ___ equal across countries

• The model assumes that trading countries produce the same goods, but countries may produce different goods if their factor ratios radically differ

• The model also assumes that trading countries have the same technology, but different technologies could affect the productivities of factors and therefore the wages/rates paid to these factors

Factor Price Equalization

• The model also ignores trade barriers and transportation costs, which may prevent output prices and thus factor prices from equalizing.

Trade and Income Distribution

• Changes in income distribution occur with every economic change, not only international trade.

• Changes in technology, changes in consumer preferences, exhaustion of resources and discovery of new ones all affect income distribution

• Economists put most of the blame on technological change and

the resulting premium paid on education

as the major cause of

increasing income inequality in the US