Chapter 7 Flashcards
What is the logic behind this chapter?
Until now, we had focused on trade theories that were static in nature, now we allow for changes in factors of production and the resultant comparative advantage and returns from trade.
What does Capital refer to?
Capital refers to all the human-made means of production, such as machinery, factories, office buildings, transportation, and communications, as well as education and training to the labour force, all of which enhance the nation’s ability to produce goods and services.
Are units of labour and capital homogeneous in this chapter? And which commodity is K and L intensive respectively?
Yes, they are homogeneous, that is identical. X is L intensive, Y is K intensive.
What happens if both L and K grow at the same rate and we have CRS in the production of both commodities?
The productivity, and therefore the returns of L and K remain the same after growth as they were before growth took place.
If only L grows, or L grows more proportionately than K, what happens?
K/L will fall, and so will the productivity of L, the returns to L, and the real per capita income.
If only the endowment of K grows, or K grows more proportionately than L, what happens?
K/L will rise, and so will the productivity of L, the returns to L, and the real per capita income.
Explain Labour Intensive and Capital Intensive Growth.
Labor intensive is when L grows faster than K, and Capital Intensive is the vice versa.
What is the Rybczynski Theorem?
At constant commodity prices, an increase in the endowment of one factor will increase by a greater proportion the output of the commodity intensive in that factor, and will reduce the output of the other commodity.
What is the magnification effect in Rybczynski Theorem?
The increase in the output of commodity X is higher than the expansion in the amount of labor because some labour and capital are also transferred from production of Y to production of X.
Summary of the theorem?
For Px and Py (hence Px/Py) to remain the same, w and r need to be constant. This can happen only if K/L remains constant in the production of both commodities. That is, when L increases, output of output of Y has to be reduced so as to release the K/L used for it. Now this K and the already existing excess L will balance the constancy. So, when L increases, X increases more than that and hence Y falls. When K is concerned, as in increases like this, Y will increase and X will fall.
What happens with the same rate of neutral technical progress in both commodities?
The PPF shifts outward evenly in all directions
In the absence of trade, does all type of technical progress tend to increase nation’s welfare?
Yes
What is protrade?
If the output of the nation’s exportable commodity grows proportionately more than the output of its importable commodity at constant relative prices, then growth tends to lead to greater than proportionate expansion of trade. This is protrade.
What is consumption protrade and production protrade?
Consumption protrade is when importable commodity consumption increases proportionately. Production protrade is when exportable commodity output increases proportionately.
What is a Tariff?
A Tariff is a tax or duty levied on the traded commodity as it crosses a national boundary.
What is immiserizing growth?
Even if the wealth effect tends to increase the nation’s welfare, the terms of trade might deteriorate so much that it leads to a net decline in the nation’s welfare.
When does immiserizing growth occur.
Occurs in Nation 1 when:
1. Growth tends to increase substantially nation 1’s exports at constant terms of trade.
2. Nation 1 is so large that that attempt to expand its exports might substantially decrease it’s terms of trade.
3. The income elasticity of Nation 2’s demand for Nation 1’s exports is very low so that Nation 2’s terms of trade will deteriorate
4. Nation 1 is so heavily dependent on trade that a substantial deterioration in it’s ToT will reduce its welfare.
