By Robert C. Feenstra
Brand new and extremely transparent presentation of the mainstream concept of foreign alternate.
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Extra resources for Advanced International Trade: Theory and Evidence
The countries engage in free trade, and we also suppose that trade is balanced (value of exports = value of imports). Then the question is: what is the pattern of trade in goods between the countries? This is answered by: Heckscher-Ohlin Theorem Each country will export the good that uses its abundant factor intensively. Thus, under our assumptions the home country will export good 1 and the foreign country will export good 2. 2 In order to derive the pattern of trade between the countries, we proceed by first establishing what 2 Because of the assumptions of identical homothetic tastes and constant returns to scale, the result we are establishing remains valid if the labor endowments also differ across countries.
12, outputs will move downwards on the Rybczynski line for ∆L , until this line hits the y1 axis. At this point the economy is fully specialized in good 1. 7, the vector of endowments (L, K ) is coincident with the vector of factor requirements (a1L, a1K) in industry 1. 7. 14 The economy will remain specialized in good 1 if there is a single cone of diversification. 8. 1-34 Feenstra, Advanced International Trade With the economy fully specialized in good 1, factor prices are determined by the marginal products of labor and capital in that good, and the earlier “factor price insensitivity” Lemma no longer applies.
This is done by multipying the numerator and denominator in the first set of inequalities by like terms. 12 1-32 Feenstra, Advanced International Trade reduce the output of industry 2 to y2’, and increase the output of industry 1 to y1’. This means that not only does industry 1 absorb the entire amount of the extra labor endowment, it also absorbs further labor and capital from industry 2 so that its ultimate labor/capital ratio is unchanged from before. The labor/capital ratio in industry 2 is also unchanged, and this is what permits both industries to pay exactly the same factor prices as they did before the change in endowments.