M2 Flashcards
(30 cards)
What is the set-up of the HO model?
2 countries (home and foreign); 2 industries (computers and shoes); 2 FoPs (capital and labor)
What are the 6 assumptions of the HO model?
(1) K and L are mobile across industries; (2) Computers are K-intensive while shoes are L-intensive; (3) Home is K-abundant while foreign is L-abundant; (4) K and L are not mobile across countries but the final outputs are; (5) Identical technology in both countries; (6) Identical consumer preferences across countries
In HO model, which good has a cheaper relative price in autarky?
the industry that uses the abundant factor intensively has a cheaper relative price (computers relatively cheaper in home; shoes relatively cheaper in foreign)
HO theorem
each country exports the good that intensively uses the factor they are abundant in and imports the other good
Stolper-Samuelson theorem
abundant factor gains and scarce factor loses (e.g. workers lose, capital owners gain in home)
Which factors gain and lose in the SR due to immigration?
workers lose due to decrease in MPL and real wage, capital and land owners gain due to increases in MPK, MPT, and real rentals
Which factors gain and lose in the SR due to immigration?
neither workers nor capital owners gain or lose due to factor price insensitivity
Rybczynski theorem
an increase in the endowment of one factor (labor) increases the output of the industry that uses that factor intensively and decreases the output of the other industry
Factor price insensitivity theorem
an increase in the amount of a factor (labor) found in an economy can be absorbed by changing the outputs of the industries, without any change in the factor prices (W/R)
What is monopolistic competition?
a type of imperfect competition (combination of monopoly and perfect competition) with numerous firms that each have some pricing power
2 key features of a monopolistic competition
(1) firms produce differentiated goods and (2) enjoy increasing returns to scale
What is intra-industry trade?
imports and exports within an industry
Marginal revenue
extra revenue earned from selling another unit
3 assumptions of the monopolistic competition model
(1) Firms produce similar but differentiated goods; (2) There are many firms in the industry; (3) Firms produce using a technology with increasing returns to scale (average costs fall as output rises); (4) Monopoly profits become zero in the long-run as firms enter and exit the industry freely
What drives trade under monopolistic competition?
increasing returns to scale, even if home and foreign are identical (e.g. in number of consumers, technology, number of firms)
Gains and adjustment costs for Canada under CUSFTA
decline in unemployment but offset by creation of new manufacturing jobs and increased productivity
Gains and Adjustment costs for Mexico under NAFTA
increased productivity in maquiladoras over the rest of Mexico but decline in real wages due to the devaluation of the peso; skilled workers in maquiladoras gained more than unskilled workers in maquiladoras and the rest of Mexico;
Trade Adjustment Assistance
program in the US that offers assistance to workers in manufacturing who lost their jobs due to import competition
2 sources of gains from trade in the monopolistic competition model
(1) rise in productivity in surviving firms, which leads to lower prices; (2) greater product variety available to consumers
Rules of origin
features in free-trade agreements (e.g. USMCA) that specify a certain amount of a product must be made in the free-trade area (e.g. NA) in order to be shipped tariff-free between countries
Index of intra-industry trade
indicates what proportion of trade in each product involves imports and exports
High vs low index of intra-industry trade
equal amount of the good is imported and exported (up to 100%); a good is either imported or exported but not both (0%)
Gravity equation
the larger the two countries are, or the closer they are, the greater the amount of trade
Why do larger countries import and export more?
import more because of higher demand and export more because of greater product variety
