ch. 4: resources, comparative advantage, and income distribution

11

Ch. 4: Resources, Comparative Advantage, and Income Distribution

22

Evolution of Trade TheoriesEvolution of Trade Theories

Adam Smith used differences in labor Adam Smith used differences in labor productivity to explain why trade occurs.productivity to explain why trade occurs.

Ricardo extended the productivity Ricardo extended the productivity differences idea to show why trade benefits differences idea to show why trade benefits both the more productive and the less both the more productive and the less productive countries.productive countries.

33

Evolution of Trade TheoriesEvolution of Trade Theories While trade is partly explained by differences in While trade is partly explained by differences in

labor productivity, it also can be explained by labor productivity, it also can be explained by differences in resources across countries.differences in resources across countries.

The Heckscher-Ohlin theory argues that The Heckscher-Ohlin theory argues that international differences in labor, labor skills, international differences in labor, labor skills, physical capital or land (factors of production) physical capital or land (factors of production) create productive differences that explain why create productive differences that explain why trade occurs.trade occurs.

44

Evolution of Trade TheoriesEvolution of Trade TheoriesHeckscher-Ohlin theory allows for all the Heckscher-Ohlin theory allows for all the

factors to be freely employed in every factors to be freely employed in every industry.industry.

H-O theory is also called “factor-proportions” H-O theory is also called “factor-proportions” theory because it allows different theory because it allows different proportions of K/L ratio to be used in the proportions of K/L ratio to be used in the production process.production process.

As new theories are developed, old theories As new theories are developed, old theories become a special case of the new theory.become a special case of the new theory.

55

Neoclassical ProductionNeoclassical Production In H-O, labor and capital can be substituted In H-O, labor and capital can be substituted

to produce a constant unit of output.to produce a constant unit of output.Each firm will try produce the highest output Each firm will try produce the highest output

with given amount of outlay by changing the with given amount of outlay by changing the proportions of capital and labor used.proportions of capital and labor used.

Typically, technologies in different industries Typically, technologies in different industries employ different ratios of capital and labor in employ different ratios of capital and labor in spite of the fact that the prices of inputs they spite of the fact that the prices of inputs they face are the same.face are the same.

66

Typical Firm BehaviorTypical Firm Behavior

Terrain Terrain

Labor LaborFOOD CLOTH

Q=1

Q=2

Q=3

Q=2

Q=3

Q=1

w/r

77

Factor Prices, Factor ProportionsFactor Prices, Factor Proportions In the previous example, the ratio of wages In the previous example, the ratio of wages

to rental rate of territory is the same for all to rental rate of territory is the same for all the firms in clothing and food.the firms in clothing and food.

Firms in food industry use a higher Firms in food industry use a higher land/labor ratio than firms in clothing.land/labor ratio than firms in clothing.aaLC LC /a/aTCTC > a > aLFLF/a/aTFTF

OrOr a aLC LC /a/aLFLF > a > aTC TC /a/aTFTF

Considering the Considering the total total resources used in each resources used in each industry, cloth production is industry, cloth production is labor intensivelabor intensive and food production is and food production is land intensive land intensive if if LLC C /T/TC C > >

LLF F /T/TFF. .

88

Output PricesOutput Prices

Assuming that all the firms operate in Assuming that all the firms operate in competitive environment, their unit cost competitive environment, their unit cost will be equal to the price they charge.will be equal to the price they charge.

99

Increase in r (Cost of Land)Increase in r (Cost of Land)

T T

L LFOOD CLOTH

Q=1

Q=3

Q=3

Q=1

w/r1

w/r2

1010

Increase in r (Cost of Land)Increase in r (Cost of Land)

All the firms react to an increase in cost All the firms react to an increase in cost of land the same way: substitute more of land the same way: substitute more labor for capital.labor for capital.

Because land is the intensive factor in Because land is the intensive factor in food, higher cost of land will raise the food, higher cost of land will raise the price of food compared to cloth.price of food compared to cloth.

Or labor is relatively cheaper so cloth Or labor is relatively cheaper so cloth will be relatively cheaper.will be relatively cheaper.

1111

Expansion PathExpansion Path

T T

L LFOOD CLOTH

Q=1

Q=2

Q=3

Q=2

Q=3

Q=1

1212

PPFPPF

If more food is to be produced, both land If more food is to be produced, both land and labor will be taken away from cloth.and labor will be taken away from cloth.

First, excess land will be taken, resulting in First, excess land will be taken, resulting in a small drop of cloth production.a small drop of cloth production.

As more and more resources are taken As more and more resources are taken away, opportunity cost of food (cloth away, opportunity cost of food (cloth sacrificed) rises.sacrificed) rises.

1313

PPFPPF

1414

What to ProduceWhat to Produce

PPF shows options given “technology.”PPF shows options given “technology.”Any point on the PPF is efficient.Any point on the PPF is efficient.How to choose “the” point?How to choose “the” point?What is the meaning of the slope of PPF?What is the meaning of the slope of PPF?How to draw a budget line and what does How to draw a budget line and what does

the slope show?the slope show?

1515

CLOTH

FOOD

Y/PF

Y/PC

PC/PF

PPF

1616

Change in rChange in r

If r increases, w/r falls.If r increases, w/r falls.Both industries prefer to lower their Both industries prefer to lower their

Land/Labor ratios (increase L/T ratios).Land/Labor ratios (increase L/T ratios).Since food is land intensive, PSince food is land intensive, PFF will go up. will go up.What happened to price ratios? Where are What happened to price ratios? Where are

we on the PPF? we on the PPF? Why did Food production INCREASE?Why did Food production INCREASE?

1717

Change in rChange in r

Why did Food production INCREASE?Why did Food production INCREASE?What happens to the Marginal Product of What happens to the Marginal Product of

Labor if less Land is used (remember Labor if less Land is used (remember Land/Labor (T/L) ratios fell)?Land/Labor (T/L) ratios fell)?

What happens to the Marginal Product of What happens to the Marginal Product of Land if more labor is employed?Land if more labor is employed?

What happens to the earnings of labor and What happens to the earnings of labor and landowners?landowners?

1818

Allocation of Land and LaborAllocation of Land and Labor

Given the prices of cloth and food, the Given the prices of cloth and food, the competitive economy will choose the point competitive economy will choose the point on the PPF where the opportunity cost of on the PPF where the opportunity cost of cloth in terms of food is Pc/Pf.cloth in terms of food is Pc/Pf.

Given the price ratios, the relative factor Given the price ratios, the relative factor prices are also determined, indicating a prices are also determined, indicating a specific choice of land/labor ratio for each specific choice of land/labor ratio for each industry.industry.

1919

Allocation of Labor and LandAllocation of Labor and Land

T

L0

T

L 0Labor in Cloth

Labor in Food

Food

Cloth

The slope is theLand/Labor ratio for Food.

2020

Increase in LandIncrease in Land

T

L0T

L 0Labor in Cloth

Labor in Food

FOOD

CLOTH

2121

Increase in LandIncrease in LandMore land in this country will make food More land in this country will make food

industry employ both more labor and land.industry employ both more labor and land. If prices of food relative to cloth remained If prices of food relative to cloth remained

the same, keeping factor prices and factor the same, keeping factor prices and factor proportions the same, food sector (land-proportions the same, food sector (land-intensive) will expand and cloth sector intensive) will expand and cloth sector (labor-intensive) will shrink.(labor-intensive) will shrink.

2222

Increase in Land in PPFIncrease in Land in PPF

F

C

2323

Relative Product Prices and Relative Product Prices and Relative Factor PricesRelative Factor Prices

A sudden increase in land, A sudden increase in land, ceteris paribus,ceteris paribus, will make land relatively cheaper than labor.will make land relatively cheaper than labor.

More land will make labor more productive More land will make labor more productive and hence raise wages.and hence raise wages.

Higher w/r ratio will raise the prices of cloth Higher w/r ratio will raise the prices of cloth relative to food.relative to food.

Income distribution will change in favor of Income distribution will change in favor of labor.labor.

2424

Two CountriesTwo CountriesC C

F FGiven the same prices, which country produces RELATIVELYmore cloth and which one relatively more food?As a result, which country’s relative supply curve (F/C) wouldbe further to the right? Price is (PF/PC).

Foreign Home

2525

Supply, Demand, PricesSupply, Demand, Prices

Pf/Pc

F/C

Foreign

Home

If tastes and incomes were the same in both countries, price of food would be relatively higher in Home and relatively lower in Foreign. Home would export cloth and Foreign would export food. Free trade would move Pf/Pc between the two price levels. Home is relatively abundant in labor and Foreign is relatively abundant in land.

2626

Price Lines in Both CountriesPrice Lines in Both Countries

F F

C

The country at left has a lower Pf/Pc than the country at right.The slope of the tangent line is equal to Pf/Pc.

C

Foreign Home

2727

Price Lines with TradePrice Lines with Trade

F F

C

The world price changes the production in both countries.The trade triangle should match both countries if these arethe only countries trading.

C

Foreign Home

2828

Trade in the Heckscher-Ohlin ModelTrade in the Heckscher-Ohlin Model

2929

Price ChangesPrice ChangesFree trade will raise the price of the product Free trade will raise the price of the product

produced by the abundant factor and will produced by the abundant factor and will lower the price of the product produced by lower the price of the product produced by the scarce factor.the scarce factor.

The country abundant in land sees an The country abundant in land sees an increase in the price of food and a drop in increase in the price of food and a drop in the price of cloth.the price of cloth.

The country abundant in labor sees an The country abundant in labor sees an increase in the price of cloth and a drop in increase in the price of cloth and a drop in the price of food.the price of food.

3030

Income DistributionIncome DistributionOwners of land in the land-abundant Owners of land in the land-abundant

country will benefit.country will benefit.Labor in the land-abundant country will Labor in the land-abundant country will

lose.lose.Owners of land in the cloth specialized Owners of land in the cloth specialized

country will lose.country will lose.Labor in the cloth specialized country Labor in the cloth specialized country

will benefit.will benefit.

3131

Factor Price EqualizationFactor Price EqualizationThere is a one-to-one correspondence There is a one-to-one correspondence

between w/r and Pc/Pf. As Pc/Pf becomes between w/r and Pc/Pf. As Pc/Pf becomes the same for both countries, so should w/r.the same for both countries, so should w/r.

The country that exports the product with the The country that exports the product with the abundant factor sees a higher return for that abundant factor sees a higher return for that factor. Before trade, abundant factor got the factor. Before trade, abundant factor got the lower return.lower return.

Scarce factor got the higher return before Scarce factor got the higher return before trade and the lower return after trade.trade and the lower return after trade.

3232

Factor Price EqualizationFactor Price EqualizationTrade makes two separate markets become Trade makes two separate markets become

one.one.The country with the relatively abundant labor The country with the relatively abundant labor

exports labor-intensive products. It is similar exports labor-intensive products. It is similar to exporting labor itself.to exporting labor itself.

The country with the relatively abundant land, The country with the relatively abundant land, exports land-intensive goods. exports land-intensive goods.

The unified market makes the prices of labor The unified market makes the prices of labor and capital in both countries to converge.and capital in both countries to converge.

3333

Testing Factor Price EqualizationTesting Factor Price EqualizationContrary to the prediction of the model, Contrary to the prediction of the model,

factor prices vary across the countries.factor prices vary across the countries.Should we scrap the model? What Should we scrap the model? What

characteristics of the model lead to characteristics of the model lead to equalization?equalization?Both countries produce both goods.Both countries produce both goods.Technologies in both countries are the Technologies in both countries are the

same.same.Prices of products become the same in Prices of products become the same in

both countries.both countries.

3434

Divergent Resource EndowmentsDivergent Resource Endowments Convergence happens when resource endowments Convergence happens when resource endowments

are similar and the relative differences force each are similar and the relative differences force each country to move more toward the specializing in country to move more toward the specializing in abundant factor using product.abundant factor using product.

If endowments are very divergent, each country If endowments are very divergent, each country would already specialize in a different product and would already specialize in a different product and trade would not equalize the factor prices.trade would not equalize the factor prices.

Factor prices need not be equalized between Factor prices need not be equalized between countries with radically different ratios of capital to countries with radically different ratios of capital to labor or of skilled to unskilled labor.labor or of skilled to unskilled labor.

3535

Different Technologies of Different Technologies of ProductionProduction

A country with a far superior technology A country with a far superior technology in both products will have higher prices in both products will have higher prices of both factors compared with the of both factors compared with the country with low technology.country with low technology.

Factor price convergence will not take Factor price convergence will not take place if technologies are very different.place if technologies are very different.

3636

Convergence of PricesConvergence of Prices

If prices in both countries do not If prices in both countries do not become the same, factor prices will not, become the same, factor prices will not, either.either.

Non-traded goods, transportation costs, Non-traded goods, transportation costs, tariffs, quotas all keep prices from tariffs, quotas all keep prices from converging.converging.

3737

Short vs. Long RunShort vs. Long Run

The model says wages and land rents will The model says wages and land rents will be the same no matter which industry be the same no matter which industry employs them. This is the long-run employs them. This is the long-run expectation.expectation.

In the short run, both factors in the In the short run, both factors in the expanding industry may benefit and those expanding industry may benefit and those in the shrinking industry suffer (Pc/Pf in the shrinking industry suffer (Pc/Pf changes).changes).

Politics is a short run phenomenon.Politics is a short run phenomenon.

3838

Factor Price Equalization?Factor Price Equalization?Real wages for unskilled labor (10Real wages for unskilled labor (10thth percentile percentile

of workers) rose only 0.2% between 1979 and of workers) rose only 0.2% between 1979 and 2001.2001.

Real wages for highly skilled labor (95Real wages for highly skilled labor (95thth percentile of workers) rose 29%.percentile of workers) rose 29%.

College premium was 21% in 1979; 44% in College premium was 21% in 1979; 44% in 2002.2002.

If US exports highly skilled labor products and If US exports highly skilled labor products and imports unskilled labor products, then H-O imports unskilled labor products, then H-O theory prediction seems to hold.theory prediction seems to hold.

3939

Factor Price Equalization Does Factor Price Equalization Does Not Apply to US ExperienceNot Apply to US Experience

H-O theory predicts that prices of goods H-O theory predicts that prices of goods will change before prices of factors.will change before prices of factors.

Goods that are exported will experience Goods that are exported will experience a rise in price.a rise in price.

Studies fail to show any increase in the Studies fail to show any increase in the prices of skill-intensive products.prices of skill-intensive products.

4040


H-O says the price of the abundant H-O says the price of the abundant factor will increase and the price of the factor will increase and the price of the scarce factor will decrease.scarce factor will decrease.

There is no indication that the return to There is no indication that the return to skilled labor in NIEs has been falling; in skilled labor in NIEs has been falling; in fact, it has been increasing.fact, it has been increasing.

4141


US trade with LDCs is very small US trade with LDCs is very small percentage of GDP. In 1990, manufactured percentage of GDP. In 1990, manufactured imports of US from LDCs was under 2% of imports of US from LDCs was under 2% of GDP.GDP.

Labor content of both the exports and Labor content of both the exports and imports constitute a very small percent of imports constitute a very small percent of total labor; it is not possible to have such a total labor; it is not possible to have such a large impact on the wages.large impact on the wages.

4242

What Is ResponsibleWhat Is Responsible for the for the GAP?GAP?

Technological change.Technological change.

4343

Trade and BenefitsTrade and Benefits

Does trade increase the total consumption Does trade increase the total consumption of the people in a country?of the people in a country?

How do you show this in a PPF and price How do you show this in a PPF and price line?line?

Ideally, every one can be better off.Ideally, every one can be better off.

4444

Trade and BenefitsTrade and Benefits

Different groups, different industries Different groups, different industries benefit and lose from trade.benefit and lose from trade.

But wages and rents will be the same But wages and rents will be the same across the industries in the long run, across the industries in the long run, helping exporters and hurting importers.helping exporters and hurting importers.

Is there enough surplus to make both the Is there enough surplus to make both the exporters and importers better off?exporters and importers better off?

4545

Trade and Income DistributionTrade and Income Distribution

There is a political bias in trade politics: potential There is a political bias in trade politics: potential losers from trade are better politically organized losers from trade are better politically organized than the winners from trade.than the winners from trade. Losses are usually concentrated among a few, but Losses are usually concentrated among a few, but

gains are usually dispersed among many.gains are usually dispersed among many. Each of you pays about $8/year to restrict imports of Each of you pays about $8/year to restrict imports of

sugar, and the total cost of this policy is about $2 sugar, and the total cost of this policy is about $2 billion/year.billion/year.

The benefits of this program total about The benefits of this program total about $1 billion, but this amount goes to relatively $1 billion, but this amount goes to relatively few sugar producers.few sugar producers.

Unemployment?Unemployment?

How much unemployment can be traced How much unemployment can be traced back to trade?back to trade?• From 1996 to 2008, only about 2.5% of involuntary From 1996 to 2008, only about 2.5% of involuntary

displacements stemmed from import competition or displacements stemmed from import competition or plants moved overseas.plants moved overseas.

• Unemployment is primarily a macroeconomic problem Unemployment is primarily a macroeconomic problem that rises during recessions.that rises during recessions.

• The best way to reduce unemployment is by adopting The best way to reduce unemployment is by adopting macroeconomic policies to help the economy recover, macroeconomic policies to help the economy recover, not by adopting trade protection.not by adopting trade protection.

4646

4747

Import Penetration and Unemployment

4848

Leontief ParadoxLeontief Paradox

Wassily Leontief (Nobel 1973) tried to Wassily Leontief (Nobel 1973) tried to test Hecksher-Ohlin theorem.test Hecksher-Ohlin theorem.

H-O says countries export products H-O says countries export products embodying the abundant factor.embodying the abundant factor.

Leontief pioneered in creating input-Leontief pioneered in creating input-output tables; he had the data on inputs output tables; he had the data on inputs used for outputs.used for outputs.

4949

K and L Required to Produce $1 millionProceedings of American Philosophical Society , 1953 (Leontief's first article)All industries; 1947 input-output table; 1947 composition of trade

Exports Import Repl A=(K/L)m/(K/L)xK (1947 $) $2,550,780 $3,091,339L (Man-years) 182 170K/L $14,015 $18,184 1.297

Review of Economics and Statistics , 1956 (Leontief's second article)All industries; 1947 input-output table; 1951 composition of trade


Without 19 nat. res. ind.; 1947 input-output table; 1947 composition of tradeExports Import Repl A=(K/L)m/(K/L)x

K (1947 $) $2,274,700 $1,853,900L (Man-years) 225 200K/L $10,129 $9,287 0.917

Without 19 nat. res. ind.; 1947 input-output table; 1951 composition of tradeExports Import Repl A=(K/L)m/(K/L)x

K (1947 $) $2,577,100 $2,092,700L (Man-years) 224 207K/L $11,493 $10,127 0.881

Excluding agriculture; 1947 input-output table; 1947 composition of tradeExports Import Repl A=(K/L)m/(K/L)x

K (1947 $) $1,501,500 $1,780,000L (Man-years) 166 157K/L $9,048 $11,306 1.250


K (1947 $) 1562200 1868200L (Man-years) 169 151K/L 9256 12412 1.341

5050

K and L Required to Produce $1 million of US Exports and Import Replacements

Baldwin, R., American Economic Review (March 1971)All industries; 1958 input-output table; 1962 composition of trade


Excluding nat. res.; 1958 input-output table; 1962 composition of tradeExports Import Repl A=(K/L)m/(K/L)x

K (1947 $) $1,223,000 $1,259,000L (Man-years) 107 106K/L $11,430 $11,877 1.039


K (1947 $) $1,403,000 $1,806,000L (Man-years) 109 100K/L $12,872 $18,060 1.403

Stern and Maskus, Journal of International Economics, (May 1981)All industries; 1972 input-output table; 1972 composition of trade


Excluding nat. res.; 1972 input-output table; 1972 composition of tradeExports Import Repl A=(K/L)m/(K/L)x

K (1947 $) $455,000 $497,000L (Man-years) 24 29K/L $18,958 $17,138 0.904

5151

Explaining Leontief Paradox?Explaining Leontief Paradox?When exports and imports are tested When exports and imports are tested

according to labor skills, the US is seen to according to labor skills, the US is seen to export more skilled labor intensive products.export more skilled labor intensive products.

New products usually are more high-skill New products usually are more high-skill labor-intensive than mature manufacturing, labor-intensive than mature manufacturing, which are capital-intensive.which are capital-intensive.

Baldwin’s numbers:Baldwin’s numbers:Education per worker 9.9 years for imports, Education per worker 9.9 years for imports,

10.1 for exports.10.1 for exports.Engineers and scientists 1.89% for imports, Engineers and scientists 1.89% for imports,

2.55% for exports.2.55% for exports.

5252

Further TestsFurther TestsH-O predicts that a country will export H-O predicts that a country will export

its abundant factor.its abundant factor. In general, exports of countries should In general, exports of countries should

include products embodied with their include products embodied with their abundant factor.abundant factor.

If a country’s endowment as a share of If a country’s endowment as a share of world endowment is compared to its world endowment is compared to its income as a share of world income, income as a share of world income, then it will export the factor if the ratio is then it will export the factor if the ratio is greater than one.greater than one.

5353

H-O Test Using Global DataH-O Test Using Global DataFactor of Production Predictive SuccessCapital 52%Labor 67%Professionals 78%Managers 22%Clerical workers 59%Salespeople 67%Service workers 67%Agricultural workers 63%Production workers 70%Arable land 70%Pasture land 52%Forest 70%

Source: H.P. Bowen, E.L. Leamer, and L. Sveikauskas, Multicountry, Multifactor Tests of the Factor Abundance Theory,” American EconomicReview 77 (December 1987), pp. 791-809.

5454

H-O Tests of North-South TradeH-O Tests of North-South TradeWhen trade between two countries with When trade between two countries with

very different endowments, like North and very different endowments, like North and South, is evaluated, it conforms to the South, is evaluated, it conforms to the predictions of H-O.predictions of H-O.

However, the trade between the developed However, the trade between the developed countries and the LDCs constitute 10% of countries and the LDCs constitute 10% of world trade.world trade.

5555

Technological DifferencesTechnological Differences The basic H-O relies on differences on factor The basic H-O relies on differences on factor

endowments and assumes same technology endowments and assumes same technology available to all countries.available to all countries.

For example, that would mean that China would For example, that would mean that China would export its labor to US much more than the numbers export its labor to US much more than the numbers indicate.indicate.

If technologies differ, then US might have an If technologies differ, then US might have an “effective” labor force much larger than the raw data “effective” labor force much larger than the raw data indicates.indicates. US has ¼ of world income but 1/20 of world labor.US has ¼ of world income but 1/20 of world labor. China has 1/35 of world income but 1/7 of world labor.China has 1/35 of world income but 1/7 of world labor.

5656

Success of H-OSuccess of H-OEmpirical studies have given less than Empirical studies have given less than

full support to H-O.full support to H-O.We need to utilize some other model to We need to utilize some other model to

explain trade patterns between similar explain trade patterns between similar countries.countries.

If H-O can predict trade patterns If H-O can predict trade patterns relatively well between North and South, relatively well between North and South, then we can use the income then we can use the income distributional predictions in that case, as distributional predictions in that case, as well.well.

4-4-5757

Movements in Factors of Movements in Factors of ProductionProduction

Movements in factors of production include Movements in factors of production include labor migration labor migration

the transfer of financial assets through international the transfer of financial assets through international borrowing and lendingborrowing and lending

transactions of multinational corporations involving transactions of multinational corporations involving direct ownership of foreign firmsdirect ownership of foreign firms

Like movements of goods and services (trade), Like movements of goods and services (trade), movements of factors of production are movements of factors of production are politically sensitive and are often restricted.politically sensitive and are often restricted.

4-4-5858

International Labor MobilityInternational Labor Mobility Why does labor migrate and what effects does labor Why does labor migrate and what effects does labor

migration cause?migration cause?

Workers migrate to wherever wages are highest.Workers migrate to wherever wages are highest.

Consider movement of labor across countries instead of Consider movement of labor across countries instead of across sectors.across sectors.

Suppose two countries produce one non-traded good Suppose two countries produce one non-traded good (food) using two factors of production: (food) using two factors of production: Land cannot move across countries but labor can.Land cannot move across countries but labor can.

4-4-5959

International Labor Mobility International Labor Mobility (cont.)(cont.)

Figure 4-13 finds the equilibrium wage and labor allocation Figure 4-13 finds the equilibrium wage and labor allocation with migration across countries.with migration across countries. Similar to how Figure 4-4 determined the equilibrium allocation of Similar to how Figure 4-4 determined the equilibrium allocation of

labor between sectors.labor between sectors.

Start with Start with OLOL11 workers in Home earning a lower real wage workers in Home earning a lower real wage (point (point CC) than the ) than the LL11OO** workers in Foreign (point workers in Foreign (point BB).). Lower wage due to less land per worker (lower productivity).Lower wage due to less land per worker (lower productivity).

Workers in the home country want to migrate to the Workers in the home country want to migrate to the foreign country where they can earn more.foreign country where they can earn more.

4-4-6060


If no obstacles to labor migration exist, workers move If no obstacles to labor migration exist, workers move from Home to Foreign until the purchasing power of from Home to Foreign until the purchasing power of wages is equal across countries (point wages is equal across countries (point AA), with ), with OLOL22 workers in Home and workers in Home and LL22OO** workers in Foreign. workers in Foreign. Emigration from Home decreases the supply of labor and raises Emigration from Home decreases the supply of labor and raises

real wage of the workers who remain there.real wage of the workers who remain there. Workers who start in the Home country earn more due to emigration Workers who start in the Home country earn more due to emigration

regardless if they are among those who leave.regardless if they are among those who leave.

Immigration into Foreign increases the supply of labor and Immigration into Foreign increases the supply of labor and decreases the real wage there.decreases the real wage there.

Wages do not actually equalize, due to barriers to Wages do not actually equalize, due to barriers to migration such as policies restricting immigration and migration such as policies restricting immigration and natural reluctance to move.natural reluctance to move.

4-4-6161

Fig. 4-13: Causes and Effects of Fig. 4-13: Causes and Effects of International Labor MobilityInternational Labor Mobility

4-4-6262


Labor migration increases world output.Labor migration increases world output. The value of foreign output rises by the area under its The value of foreign output rises by the area under its MPLMPL**

curve from curve from LL11 to to LL22

The value of domestic output falls by the area under its MPL The value of domestic output falls by the area under its MPL curve from curve from LL22 to to LL11

World output rises because labor moves to where it is more World output rises because labor moves to where it is more productive (where wages are higher).productive (where wages are higher).

The value of world output is maximized when the marginal The value of world output is maximized when the marginal productivity of labor is the same across countries.productivity of labor is the same across countries.

4-4-6363


Workers initially in Home benefit while Workers initially in Home benefit while workers in Foreign are hurt by inflows of workers in Foreign are hurt by inflows of other workers.other workers.

Landowners in Foreign gain from the inflow of Landowners in Foreign gain from the inflow of workers decreasing real wages and workers decreasing real wages and increasing output.increasing output.

Landowners in Home are hurt by the outflow Landowners in Home are hurt by the outflow of workers increasing real wages and of workers increasing real wages and decreasing output.decreasing output.

4-4-6464


Does migration lead to the wage changes predicted?Does migration lead to the wage changes predicted? Table 4-1 shows that real wages in 1870 were much Table 4-1 shows that real wages in 1870 were much

higher in destination countries than in origin countries.higher in destination countries than in origin countries. Up until the eve of World War I in 1913, wages rose Up until the eve of World War I in 1913, wages rose

faster in origin countries than in destination countries faster in origin countries than in destination countries (except Canada).(except Canada).

Migration moved the world toward more equalized Migration moved the world toward more equalized wages.wages.

4-4-6565

Table 4-1Table 4-1

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In the early 20In the early 20thth century, share of immigrants in the century, share of immigrants in the U.S. increased dramatically.U.S. increased dramatically.

Vast immigration from Eastern and Southern Europe.Vast immigration from Eastern and Southern Europe.

Tight restrictions on immigration imposed in the 1920s.Tight restrictions on immigration imposed in the 1920s. Immigrants were a minor force in the U.S. by the 1960s.Immigrants were a minor force in the U.S. by the 1960s.

New wave of immigration began around 1970.New wave of immigration began around 1970. Mostly from Latin America and Asia.Mostly from Latin America and Asia.

As of 2006, 15.3% of the U.S. labor force foreign-born.As of 2006, 15.3% of the U.S. labor force foreign-born.

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Fig. 4-14: Immigrants as a Percentage of the U.S. Fig. 4-14: Immigrants as a Percentage of the U.S. PopulationPopulation

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Immigration and the U.S. Immigration and the U.S. EconomyEconomy

The largest increase in recent immigration The largest increase in recent immigration occurred among workers with the lowest occurred among workers with the lowest education levels, making less educated education levels, making less educated workers more abundant.workers more abundant.

possibly reduced wages for native-born possibly reduced wages for native-born workers with low education levels while workers with low education levels while raising wages for the more educatedraising wages for the more educated

wideningwidening wagewage gapgap betweenbetween less educated less educated workers and highly educated workers.workers and highly educated workers.

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SummarySummary

1.1. International trade often has strong effects on the International trade often has strong effects on the distribution of income within countries -- produces distribution of income within countries -- produces losers as well as winners. losers as well as winners.

2.2. Income distribution effects arise for two reasons:Income distribution effects arise for two reasons: Factors of production cannot move costlessly and quickly from Factors of production cannot move costlessly and quickly from

one industry to another.one industry to another. Changes in an economy’s output mix have differential effects Changes in an economy’s output mix have differential effects

on the demand for different factors of production.on the demand for different factors of production.

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Summary (cont.)Summary (cont.)

3.3. International trade affects the distribution of income in International trade affects the distribution of income in the specific factors model.the specific factors model.

Factors specific to export sectors in each country gain from Factors specific to export sectors in each country gain from trade, while factors specific to import-competing sectors lose. trade, while factors specific to import-competing sectors lose.

Mobile factors that can work in either sector may either gain or Mobile factors that can work in either sector may either gain or lose.lose.

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4.4. Trade nonetheless produces overall gains in the sense Trade nonetheless produces overall gains in the sense that those who gain could in principle compensate those that those who gain could in principle compensate those who lose while still remaining better off than before.who lose while still remaining better off than before.

5.5. Most economists would prefer to address the problem Most economists would prefer to address the problem of income distribution directly, rather than by restricting of income distribution directly, rather than by restricting trade.trade.

6.6. Those hurt by trade are often better organized than Those hurt by trade are often better organized than those who gain, causing trade restrictions to be those who gain, causing trade restrictions to be adopted.adopted.

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7.7. Labor migrates to countries with higher labor Labor migrates to countries with higher labor productivity and higher real wages, where labor is productivity and higher real wages, where labor is scarce.scarce.

Real wages fall due to immigration and rise due to emigration.Real wages fall due to immigration and rise due to emigration. World output increases.World output increases.

8.8. Real wages across countries are far from equal due to Real wages across countries are far from equal due to differences in technology and due to immigration differences in technology and due to immigration barriers.barriers.

ch. 4: resources, comparative advantage, and income distribution

Documents

food production increase

labor productivity

food industry

price of food

labor skills

land intensive

opportunity cost of

higher cost of land