Flashcards in H-O Deck (78)
What class of Trade theory is HO? Why do countries trade?
Neoclassical model - countries trade because they’re different from one another.
How are countries different in HO
Different resource endowments
Another name for HO model
Factor proportions theory
What do we assume about the use of resources
FULL EMPLOYMENT - no unemployment or unused land
Assumption about market structure
Perfect Competition in goods and factor markets
(Since it’s a neoclassical model)
What do we assume about factor mobility?
Mobile across industries
Immobile across countries
When we have more than one FOP, what does this mean for PPF.
PFF no longer a straight line - KINKED
Give 2 resource constraints
aTF QF + aTC QC = T
aLF QF + aLC QC = L
Relative intensity assumptions
Cloth = labour intensive
Food = land intensive
aLC/aTC > aLF/aTF
What does the intensity assumption mean for opportunity costs?
aLC/aLF > aTC/aTF
opportunity cost of cloth in terms of food higher for labour constraint.
Hence labour constraint is steeper.
In words, why is the opportunity cost of cloth in terms of food higher for labour than land constraint
Cloth is labour intensive, so to produce one more unit of cloth, more food has to be given up to free up the necessary labour.
Intensity assumption in terms of total resources by industry
LC/TC > LF/TF
- the cloth industry uses a higher labour to land input ratio
Why do we get a kinked PPF?
Because we have 2 constraints. The kinked PPF is where both constraints are satisfied simultaneously.
what are the 2 slopes of the kinked PPF??
Slope of PPF = opportunity cost of cloth in terms of food
Pre-kink: slope = aTC/aTF
post: slope = aLC/aLF
How does opportunity cost of cloth change with mix of production?
The more cloth we have compared to food, the higher the opportunity cost if cloth in terms of food of producing an extra unit of cloth.
How do we get a curved PPF?
Allow for input substitutability
- can substitute less land for more workers or visa versa
Hence as not constant across outputs.
How many different opportunity costs along curved PPF
What do isoquants show
Combinations of input that produce the same level of output
L shaped isoquant means
NO substitution of inputs - can only use them in a fixed ratio.
Curved isoquant means
Continuous substitution of inputs (not at a constant rate as then it would be a straight line)
Other than the PPF, what else do we need to determine optimum production?
PPF = what an economy CAN produce
Adding prices = tell us what an economy WILL produce
What’s an isovalue line?
Shows a constant value of production
V bar = PcQc + PfQf
Give isovalue line equation with Qf as subject and hence what is slope f isovalue
Qf = V bar / Pf - Pc/Pf Qf
Slope = relative price of cloth in terms of food.
Optimality condition for production
Isovalue line tangent to PPF
Slope of isovalue line = slope of PPF
Relative price of cloth = opportunity cost of cloth
Why does finding optimum production not automatically give up input combinations?
Because of input substitutability, this output can be produced with different combinations of inputs. We need input prices to determine inout usage.
Explain CC and FF demand functions graphically
X axis = T/L
Y axis = w/r
Therefore CC & FF slope upwards
What do our relative intensity assumptions men for CC and FF? (2)
CC is to the left of FF: T/L is higher for food at any given w/r
CC is steeper
FOC under perfect competition