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Flashcards in H-O Deck (78)
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1

What class of Trade theory is HO? Why do countries trade?

Neoclassical model - countries trade because they’re different from one another.

2

How are countries different in HO

Different resource endowments

3

Another name for HO model

Factor proportions theory

4

Model dimensions

2-2-2
2 countries
2 goods
2 FOPs

5

What do we assume about the use of resources

FULL EMPLOYMENT - no unemployment or unused land

6

Assumption about market structure

Perfect Competition in goods and factor markets
(Since it’s a neoclassical model)

7

What do we assume about factor mobility?

Mobile across industries
Immobile across countries

8

When we have more than one FOP, what does this mean for PPF.

PFF no longer a straight line - KINKED

9

Give 2 resource constraints

aTF QF + aTC QC = T
aLF QF + aLC QC = L

10

Relative intensity assumptions

Cloth = labour intensive
Food = land intensive
aLC/aTC > aLF/aTF

11

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.

12

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.

13

Intensity assumption in terms of total resources by industry

LC/TC > LF/TF
- the cloth industry uses a higher labour to land input ratio

14

Why do we get a kinked PPF?

Because we have 2 constraints. The kinked PPF is where both constraints are satisfied simultaneously.

15

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

16

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.

17

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.

18

How many different opportunity costs along curved PPF

Infinite

19

What do isoquants show

Combinations of input that produce the same level of output

20

L shaped isoquant means

NO substitution of inputs - can only use them in a fixed ratio.

21

Curved isoquant means

Continuous substitution of inputs (not at a constant rate as then it would be a straight line)

22

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

23

What’s an isovalue line?

Shows a constant value of production
V bar = PcQc + PfQf

24

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.

25

Optimality condition for production

Isovalue line tangent to PPF
Slope of isovalue line = slope of PPF
Relative price of cloth = opportunity cost of cloth

26

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.

27

Explain CC and FF demand functions graphically

X axis = T/L
Y axis = w/r
Therefore CC & FF slope upwards

28

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

29

FOC under perfect competition

P=MC

30

Stolper Samuelson theorem & explain

The higher the relative price of labour, the higher the relative price of the good that uses labour intensively.
Hence higher w/r —> higher Pc/Pf
Backwards interp: the higher the relative price of a good, the higher the relative return to the FOP used intensively in that good production.