topic 5.2
HUMAN SKILLS THEORY
- Focuses on skilled vs. unskilled workers.
- US is skilled labor abundant. So the Leontieff paradox is no longer a paradox - the captial/labor distinction no longer exists.
PRODUCT LIFE CYCLE THEORY
- Initially new products are developed and exported from developed countries.
- Later production is standardized and produced abroad, which may be a capital-intensive process. This explains the Leontieff Paradox.
- A problem with this model is that it seems more plausible with sophisticated products.
- Comparative advantage arises from the demand side.
- Trade will occur between countries with similar tastes - so developed countries will trade with other developed countries for reasons of consumer preference.
- This model applies best to differentiated consumer products.
- Could also help to explain intraindustry trade.
- Is intraindustry trade a statistical artifact?
INCREASING RETURNS AND IMPERFECT COMPETITION
- Increasing returns: a proportionate increase in inputs results in a greater than proportionate increase in outputs.
- Increasing returns can be internal to a firm or external to an individual firm (but internal to an industry - i.e. as an industry grows everyone's costs go down).
- A convex (to origin) PPF can represent increasing returns. As more resources are shifted to one industry output increases more than proportionately.
- When a country opens to trade even if the relative price of goods do not change the country still has an incentive to specialize. this can be shown with the curved PPF where complete specialization with trade allows the country to reach a higher CIC even though the value Ps/Pf has not changed.
- There is no simple rule for optimal specialization. History can establish an industry in a location and it remains there for hundreds of years.
- It is no longer true that perfect competition prevails because the choices of one firm affect market prices. We have monopoly, oligopoly, or monopolistic competition.
- With imperfect competition it becomes more difficult to predict the welfare effects of trade.
