International Trade

Factor Growth and Trade

(All the assumptions of H-O-S are sustained.)

At constant commodity prices, an increase in the endowment of one factor (say L) will increase the output of the commodity intensively using that factor (say X), and will reduce the output of the other commodity (say Y).

Proof

Consider H: L-abundant country and X is L-intensive. PPF is biased toward X [1] , and H produces at A [2] where the world commodity price is the tangent of PPF [3] .

If L increases, H's PPF shifts outward, being more oriented toward X [4] . With the same world price PX/PY, H will produce at A' [5] .

Result: As L , the output of X (L-intensive) increases, and the output of Y (K-intensive) decreases.

Rybczynski Line

We can derive a country's growth path by connecting [1] all optimal output points as a factor increases.

General Equilibrium Approach

Consider an Edgeworth Box explaining H's production. At equilibrium A [1] , Isoquants for X [2] and Y [3] must be tangent, and the tangent line represents the relative factor price (W/r) [4] .

X employs LX labour [5] and KX capital [6] , and produces a certain amount of X at A. Factor intensity of X (=kX) is the slope of the straight ray OXA (=KX/LX) [7] . The distance OXA [8] represents the amount of X produced. Y employs LY labour [9] and KY capital [10] , and produces a certain amount of Y at A. Factor intensity of Y (=kY) is the slope of the straight ray OYA (=KY/LY) [11] . The distance OYA represents the amount of Y produced [12] .

Now, if H's labour endowment increases for some reason (with fixed K), the box will expand horizontally (as much as new L) [13] while the height will still be the same (as K does not change).

At constant commodity prices, factor prices will be constant. As factor prices are constant, factor intensities kX [14] and kY [15] will be the same as before. Therefore, the new equilibrium A' [16] should satisfy the following conditions:

  • IX and IY must be tangent [17] .
  • The tangent is the factor price, which should be the same as before [18] .
  • Each sector must keep the same factor intensities, kX and kY

    • We can find A' satisfying all the conditions. A' is found to be further than A from OX and closer than A to OY. This result suggests that, as L increases, sector X expands and sector Y shrinks.



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    Copyright © 1997-2003 Dr MoonJoong Tcha
    [mtcha@ecel.uwa.edu.au]
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