Within a country

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Chapter 5: Who Gains and
Who Loses from Trade?
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Within a country

SR effects of opening trade

The US - exports wheat (price of wheat increases
compared to pre-trade levels)
US winners: landlords in wheat production,
farm workers
 US losers:
cloth workers,

landlords in cotton


wheat
ROW – exports cloth (price increases)
ROW winners: cloth workers, landlords in cotton and wool
production
 ROW losers: landlords in wheat production, wheat farm
workers

5-2

LR factor-price response – factors move between
sectors in search of higher returns (income gaps in
SR)
In the US…
 Some US cloth workers will find jobs in wheat
production
 Wages in wheat production will decline after the SR
increase (how much?)
 Wages in cloth production will increase after the initial
decrease
 Some land will be used for wheat instead of cotton and
wool
 Rents on land used for wheat will decline after the initial
increase

5-3
5-4


Will wages and rents go back to their pre-trade
levels after the LR adjustment?
No!

LR winners: US landowners and foreign workers
The price of land stays above pre-trade levels in US
 The price of labour remains above pre-trade levels in
ROW



LR losers: US workers and foreign landowners
Reason: wheat is more land intensive and cloth
is more labour intensive
5-5
5-6
Implications of the H-O theory

The Stolper-Samuelson Theorem
Trade changes product prices – wheat has a higher
relative price than pre-trade in US
 Real return to the factor used intensively in the risingprice industry rises (land in wheat production in the
US)
 The real return to the factor used intensely in the
falling-price industry falls (labour in cloth production
in the US)
 This does not depend on how much of each product

5-7

The specialized-factor pattern
The more a factor is specialized, or concentrated, in
the production of a product whose relative price is
rising, the more this factor stands to gain from a
change in the product price
 The more a factor is concentrated into the
production of a product whose relative price is
falling, the more it stands to lose from the change in
the product price

5-8

The factor price equalization theorem
With time not only product prices equalize, but also
factor prices (even if factors don’t move across
countries)
 Workers earn the same wage rate in both countries

Pre-trade wages in US are higher due to scarcity
 After trade wages decline
 Pre-trade wages are lower in ROW (abundant)
 After-trade wages are higher (cloth-export)


Land earns the same return in both countries
5-9
International Factor Price Equalization




With the shift to free trade: For each factor, its rate of return
becomes more similar between countries. Under ideal conditions,
its real rate of return is the same in different countries.
Example: Labor.
With no trade, the wage rate is high in the labor-scarce country.
The wage rate is low in the labor-abundant country.
With free trade, the import of labor-intensive products pushes
the wage-rate down in the labor-scarce country. The export of
labor-intensive products pulls the wage rate up in the laborabundant country.
5-10
H-O and actual trade patterns


Factor endowments see table
International trade – see table
5-11
Figure 5.3 - Shares of the World’s
Factor Endowments, Early 2000s
5-12
5-13
Export-oriented and importcompeting factors


The US pattern – see table
The Canadian pattern –see table
5-14
Factor Content of U.S. Exports and
Competing Imports
5-15
Canada’s Exports and Competing
Imports
5-16
Do factor prices equalize
internationally??


The strong form of theorem is subject to many
assumptions and conditions
A weak form of the theorem – tendency of
factor prices towards equalization
5-17
5-18
5-19
5-20
International Factor Price
Equalization


With the shift to free trade: For each factor, its rate of
return becomes more similar between countries. Under
ideal conditions, its real rate of return is the same in
different countries.
Example: Labor.
 With no trade, the wage rate is high in the laborscarce country. The wage rate is low in the laborabundant country.
 With free trade, the import of labor-intensive
products pushes the wage rate down in the laborscarce country. The export of labor-intensive
products pulls the wage rate up in the laborabundant country.
5-21
5-22
5-23
5-24
5-25
5-26
5-27
5-28
5-29
5-30
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