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Ricardian assumptions(6 items)

2 countries 2 goods
-1 factor (labor)
-competitive markets
-free trade-
-constant MPL (straig
ht PPF)
-Labor moves b/w industries but not across countries straight ppf


Ricardian impact of trade on relative prices

If home has comparative advantage in good x then Px/Py goes up due to trade because relative price of x goes up


Ricardian Predictions

Each country would fully specialize in producing the good in which it has comparative advantage+ all factors gain from trade (higher welfare)


ricardian Impact of trade on returns to factor

Labor experience increase in nominal and real wages


specific factors model explains trade based on

differences in technology


Specific factors: Assumptions( 4 items)

-2 countries 2 goods
-3 factors capital to manufacture land to agri and labor used in both
-Competitive markets
-free trade
-diminishing returns concave PPF


Specific Factors impact of trade on prices

if home has comparative advantage in manufacturing PM/PA goes up as a result of trade


Specific factors predictions

-the increase in relative price of an industrys output increases the real rental earned by the factor specific to that industry and decreases the rental of the factor specific to the other industry


Specific factor impact of trade on returns to factors

capital gains rental on capital goes up
land owners lose in real terms rental on land goes down
impact lof labor is ambiguous real wages agri go up and real wages manu go down


H-O explains trade based on

difference in resources


H-O:assumptions(6 items)

-2 countries Home is capital and foreign is labors
- 2 industries computers capital and shoes labor
-2 factors labor and capital
-factors move freely
-diminishing returns concave PPF
-Free markets and free trade with identical tech and homogenous preferences.


H-O: impact of trade on prices

if homes is capital abundant then PC/Ps goes up


H-O: Predictions

each country exports the good that uses intesively its abundant factor of production and imports the other good


H-O impact of trade on factors

real rentals on capital increase b/c relative price increase but real wages fall


Stolper-Samuelson theorem: H-O model

an increase in the relative price of a good leads to an increase in returns of the factor used abundantly in producing that good and decreases the return to the other factor.


Leontief Paradox

The major thing is Leontief found the opposite of H-O theory when using US data on year 1947… several explanations are given… the solution of the paradox is to compute effective K/L ratio as opposed to just K/L ratio because factor productivity differs greatly across countries.


Factor intensity theorem

In the HO model with two goods and two factors, an increase in the amount of a factor found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices.


Rybzcenski theorem

In the H-O model with two goods and two factors, an increase in the amount of a factor found in an economy will increase the output of the industry using that factor intensively and decrease the output of the other industry.


Nash outcome

if countries are given autonomy to tariff as they please the worst possible outcome in terms of overall welfare will be achieved


specific factor model losing labor and gaining labor

higher wages but lower rentals and output for agri and manu if you gain people from immigration the opposite holds true lower wages but higher rentals and output for agri and manu


impact of immigration in the short run

wages decrease increase in both RPk RPt and output for both industries


impact of immigration in the long run

no effect on wages no effect to other factors because of factor price intensity theorem and output of labor intensive industry increase while output of capital intensive industry decrease(Rybzcenski theorem)


impact of FDI in the short run

increase in wage but decrease in both RPk and RPt output of manufacturing increases but output of agri shrinks since it is a capital injection


long run FDI effects

no effect on wages and does not affect returns to other factors (Factor intensity theorem) output of capital intensive industry increases and output of the land industry decreases(rybzinski theorm)


why do countries impose trade barriers: Dumping

the sale of goods abroad at a price below the cost of production


area b and d in tariff diagram

production loss and consumption loss


allocation for quota rents

giving quota to home firm, rent seeking, auctioning the quota, voluntary export restraint`


Tariffs in a small country( 4 items)

-small country takes world price as given
-tariffs increase producer surplus reduce consumer surplus
- tariffs create deadweight loss( areas b and d)
-so small countries shouldnt impose tarriffs


tariffs in a large country(5 items)

-a large economy affects world price
-upward sloping export curve
-economy can benefit due to area C
-needs to find the optimal tarrif or risk loss
-the rest of the world loses when a country tariffs


1. giving the quota to home firms

permits to import the quantity allowed under the quota system can be given to home firms home firms earn rent

-fall in consumer surplus -(a+b+c+d)
-rise in producer surplus +a
-quota rents earned at home +c
-net effect on home welfare -(b+d)