Transcript
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Introduces how international trade changes relative prices and shifts production toward the export industry. Explains how these price changes affect labor demand, wages, and rental rates using marginal productivity.
welcome back uh in the previous video we discussed how international trade leads to a convergence of relative prices between cloth and food we also um talked about uh how producers and consumers uh in hong and foreign responded tothat change okay now uh in this video we're gonna talk about the distributional uh effect of trade okay and um once again we start with the change in relative price of cloth to food because of international trade okaywe're still gonna rely upon uh the same graphical tool uh we used before okay and um we start once again we focused on uh home economy here okay starting from point a right that's where um the homes economywas kind of before trade and uh because of a trade or when home and foreign open up their doors to each other and as we said before uh home is going to export cloth because uh the cloth production
is labor-intensive right and home is uh abandoned in neighbor right so we find here on the left-hand side of this uh graph where the home economy is moving from a to b along this curve okay in other wordsum we're going to see a higher relative price of cloth in home all right and because of that as we said um the cloth industry in home would expand they're gonna produce more cloth okay and export them touh foreign to make a higher profit right now because um along with the expansion of the cloth industry they're going to use more labor right so there are there is a higher demand for labor which will push upum the price of labor uh w here right so uh we find that the w over r ratio would increase during this process okay now when neighbor becomes more expensive relatively okay and capital becomes relatively cheaper then we
would say in both cough and food industry they tend to use less amount of labor and more of capital right and that would lead to a smaller uh l 2k ratio in both industries so that's why here uhwe see they're moving both are moving up along their curve all right and so this is how the change in relative factor prices w over r uh change the input choices of these firms okay and what happens tothe welfare of labor and capital owners this should be very straightforward okay now here the only thing we need to bear in mind is we cannot just look at w over p for example when we look at thewelfare of labor right and we are supposed to look at the real wage which is w over p however here as we said both w and p no matter its price of cloth or price of food are changing
simultaneously right so we really don't know like you know that ratio would go up or go down okay and similarly we cannot look at the real rental price r over p because both r and p are changing herebut the good news is remember we said in the long run w over p equals marginal product of labor right r over p real rental price equals marginal product of capital so mpl and mpk would give us apretty easy way to figure out the welfare of these factors
Uses diminishing returns to show why workers gain from trade while capital owners lose in this example. Concludes with the Stolper-Samuelson theorem and the idea that trade creates winners and losers.
so the change in real wage and change in rental price remember there's a very important thing we discussed before it's called ldr law of dimension returns right we know that you know the um returns the marginal um returnsof a factor either capital or labor would decline when we use more of that factor right so here remember we discussed the input choices made by firms in both industries firms tend to use less amount of labor becauseit becomes more expensive lawmen only right now when we use less amount of labor of course mpl would go up right mpl would go up and uh so the w over pc that's the real wage in terms ofthe price of crop in real wage in terms of food would both rise okay once again because we use fewer units of labor so the remaining labor would be more productive because of dimensional returns and when its productivity
goes up it should get a higher pay so the real wage in terms of the prices of food and path would both go up okay similarly we will find the rental price would go down okay remember this isbecause in both food and cloth industries they use more of capital now because of the dimensional returns to capital then other the um last unit of capital added would be less productive right so their real rental price woulddecrease now using layman's term here we could say workers are better off and capital owners are worse off okay this is so-called stopper samusan theory okay it's named after two economies this theorem says that abandoned factor gains fromtrade the scarce factor loses from trade once again trade creates winners and losers okay and in international trade or on the global market because a country tends to export uh the product which uses um its abandoned factor okay
so um the uh the industry of that factor um or that product expands and that's how the abandoned factor gains from trade okay and of course the other factors which uses the scarce factor i'm sorry the other industrywhich uses the scarce factor uh tend to shrink that's why they lose from trade okay now um upon this moment we already learned a lot of um important conclusions okay about output relative prices uh winners and losers or
Shifts to the empirical question of how to determine which countries are abundant in which factors. Explains the factor-endowment comparison method using U.S. data and raises two conceptual questions about relative measures and GDP benchmarks.
welfare of labor and capital owners right but there's a very important fundamental question we want to answer that is in reality which country is abandoned in which factor right because the actual only model tells us that you knowthe pattern of trade or the distribution of income um are determined by uh the abundance of factors of production right or abundance of resources now how could we measure that for example u.s is abandoned in which factor capitallabor technology land which one and how could we approach these uh empirically okay how could we even test it now here we're showing you this uh interesting figure okay now you see uh like six different factors presented herefrom physical capital to r d scientists skilled labor less skilled labor illiterate labor and arable land okay and uh these sex factors what we're showing you is uh for these economies uh in the rest of the world um
how much they have in terms of their share in total uh endowment of the world now for example when we look at the united states the red part or the red bars okay and uh if we look atthe physical capital we find that united states has about 24 percent of the world's physical capital okay r d scientists uh u.s has a 21.26.1 percent of the world's uh uh r d scientists okay once again all ofthese numbers you see are the shares of each country in the world's total endowment okay now you also see in the last bar here or the column um the the uh is the gdp okay the output for examplehere the us output accounts for about 21.6 percent of the world's total gdp okay now we wanna why we want to use the gdp here because we we are gonna define the abundance of the factor on the basis
of this one we're going to use the gdp share as the benchmark for example we're going to say that you know if a factor's share if a country's share of that factor is greater than its share in wordsgdp then that country is abandoned in that factor okay once again let's talk about the physical capital okay so u.s accounts for 24 of the world's total physical capital endowment but the u.s output accounts for only 21.6 percentof the world's total gdp this number is smaller than this one that means by definition your u.s is abandoned in physical capital okay now let's look at the another example less skilled labor okay the u.s has about 4.9percent of the world's total mass scaled labor uh but its output accounts for about 21.6 right so this number is far less than the output share that means u.s is not abandoned in less scaled labor or you could
say the u.s is scarce in less scaled labor now here this this figure helps us you know um has a pretty clear idea about which country is abandoned in which factor but there are two quick questions we wantto leave for you guys to think about okay the first one is um which why here we use the country's share of that factor why not use just the absolute amount okay in other words the physical capital what'sthe absolute amount the u.s has the when we look at the arable land for example why not use the error the absolute amount right like how many acres we have uh why we need to compare with the wordstotal endowment of that factor okay so that's the first uh question right why use the relative term instead of the absolute one the second question is why would it compare its share compare the share of the factor to
that uh the words gdp right we said that you know if if this share is greater than the output share then we said it's abandoned if it's nest then it's scarce while we