Term
Assumption 1
Rational Behavior |
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Definition
| Individuals maximize utility (satisfaction) subject to constrains (budget.) |
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Term
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Definition
| 2 countries that produce 2 goods (homogenous) |
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Term
Assumption 3
No money illusion |
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Definition
| We care about the relative prices of goods. (Opportunity Cost: The price of goods expressed in terms of other goods.) Nominal: Expressed in monetary units. |
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Term
Assumption 4
Perfect Competition |
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Definition
| Perfect competition in both countries and industries. |
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Term
Assumption 5
Factor Endowments |
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Definition
| Factor endowments are fixed. (land, labor, capital and technology) |
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Term
Assumption 6
Mobility of Production |
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Definition
| Factors of production are perfectly mobile between two industries within each country, but not accross borders. |
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Term
Assumption 7
Utility Measures |
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Definition
| Utility measures the satisfaction derived from an consumption decision. (Individuals make choices that maximize utility.) |
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Term
Assumption 8
Factors of production |
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Definition
| Factors of production cannot move between countries |
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Term
Assumption 9
Trade Barriers |
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Definition
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Term
Assumption 10
Trade Deficits |
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Definition
| No trade deficits: Exports must pay for imports. |
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Term
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Definition
| Labor is the only factor of production |
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Term
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Definition
| Production exhibits constant returns to scale between labor and output. Y=AE A>1 (Contstant opportunity cost) |
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Term
HO Assumption: 13
2 Factors of Production |
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Definition
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Term
HO Assumption:14
Technology |
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Definition
| Both countries have access to the same types of technology |
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Term
HO Assumption: 15
Good Y labor |
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Definition
Good Y always has more labor per machine relatively.
Good Y = Labor intenstive
Good X = Capital intensive |
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Term
HO Assumption: 16
Factor Endowments |
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Definition
Countries differ in their factor endowments of L and K.
Country A is relatively capital abundant.
Country B is relatively Labor abundant. |
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Term
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Definition
| Tastes are identical: Original assumptions do not include tastes because demand was not a factor. |
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Term
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Definition
| A country will have a comparative advantage in, and therefore, will export that good whose production is relatively intensive in the factor with which that country is relatively well endowed. |
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Term
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Definition
| At constant world prices, if a country experiences an increase in the supply of one factor, it will produce more of the product whose production is intensive in that factor and less of the other product. |
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Term
| The Factor price of Equilization Theorem |
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Definition
| Given all assumptions of the HO model, international trade will lead to the international equilization of factor prices. |
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Term
| Stopler Samuelson Theorem |
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Definition
| Free trade benefits the abundant factor and harms the scarce factor. |
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Term
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Definition
| In those industries in which labor productivity in the U.S. was higher relative to the U.K., the U.S. exports should be higher relative to UK exports. |
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Term
Leontief Paradox
In Theory |
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Definition
US was capital abundant, therefore shoulc export capital intensive goods, Import labor intensive goods.
The K/L ratio should be higher in exported godos than imported goods. |
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Term
Leontief Paradox
Actual Findings |
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Definition
US exports were labor intnesive when should have been capital intensive because:
Assumed US had equal labor productivity as foreign workers.
Natural Resources were ignored
Assumption of identical taste violated
Countries do not use the same production techniques. |
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Term
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Definition
IO: Exports/GNP X 100
Exports/ C+I+G+(X-M)
(The higher the number is higher openneess) |
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Term
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Definition
Improvement in Technology
Increase in resource supply
Education in Labor |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| 1/Marginal Propensity to Leak = 1/(MPS+MPI) |
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