Expectations of future returns which Influence the perceived benefits of capital movement 2. The technology of the adjustment process which determines the costs of capital movement This article divides its discussion into five different sections as detailed below. Section l: displays a simple model of the technology of capital movement which preserves the long-run properties of the HOSE model. The Basic Model This model depicts a small open economy which produces two goods, X and Z, and takes the relative price of X In terms of Z, P as given.
Production of each good requires labor and capital The production function Is as follows *Production of X is assumed to be capital intensive at every age-rental ratio Z = G (Liz, Oz). (2) Labor is freely mobile between industries but Capital is assumed to be a quasi-flexed factor. To transfer a unit of capital from X production to Z production (or vice versa), a capital owner must purchase the services of a capital-moving firm. These specific resources do not include any capital which could be used to produce X or Z.
The capital-movement industry Is assumed to be competitive and the technology for the industry is assumed diminishing returns to the variable factor I. E. Al = b k, b > O, The demand for labor in each of the final goods industries depends on the wage rate measured in terms of Z), w, and on the amount of capital in that industry. Given K, it follows that the demand for labor in the two final goods industries depends on w and on the distribution of the capital stock, represented by Xx.
The demand for labor In capital movement depends, according to (3), on the rate of capital movement, K. The last property follows from the assumption that X is relatively capital intensive. For any individual capital-moving firm, total (variable) costs are w Lie = w b (Ski) 2, where Lie is the amount of labor used by this firm. Competition requires that each capital-moving rim charge a price for capital movement equal to the marginal cost of providing the service.
By moving a unit of capital from one industry to another, the owner captures the difference between the values of a unit of capital In the two Industries. The rate AT capital movement at any moment AT time Is eternal Day ten contralto Tanat ten marginal cost of capital movement must equal the marginal benefit: The shape of the marginal cost curve insures that the adjustment process will have three desirable properties: First, since the marginal cost of capital movement is an increasing unction of k, there is an economic incentive to distribute adjustment over time rather than do it all at once.
Second, since the marginal cost of capital movement, at K = O, is zero, the economy can ultimately converge to the long-run equilibrium of the HOSE model in which the returns to capital and hence the values of capital in the two industries are equalized. Third, since in the region of K = O the marginal cost curve is approximated by a ray through the origin, when the economy is near its long-run equilibrium the rate of capital movement will be roughly proportional to the preference between the values of capital located in the two industries.
Section II: describes the process of adjustment under this model of technology, when capital owners have static expectations concerning wage rates and returns to capital. Under static expectations, capital owners expect the current wage rate and the current value of the marginal product of capital in each industry to persist indefinitely Section Ill: demonstrates the importance of expectations by comparing the results of Section II with those obtained for the same technology when capital owners have “rational” expectations.
This section has a major difficulty with the analysis of the preceding section because the author views that the static expectations are incorrect, except when the economy has reached its long-run equilibrium. Along the adjustment path, the wage rate, and hence the values of the marginal products of capital in both industries, are changing continuously. The author states that by using a technique developed by Lucas (1966), it is easy to compare the path of the economy under rational expectations with the path of the economy under static expectations. The economy converges to its long-run equilibrium more rapidly under static expectations than under rational expectations. Section lb. Takes up alternative specifications of the technology of adjustment 🙁 Linear Labor Requirements, Capital Formation with increasing marginal Costs, Industry-specific Adjustment Costs When marginal adjustment costs are positive, even at a zero rate of capital movement, the equilibrium of the HOSE model is not, in general, achieved, even in the long run.
When capital is a producible, depreciating resource (rather than simply movable from one industry to another), the properties of the HOSE model are preserved with respect to the long run behavior of factor prices. Section V: discusses the role of public policy in the adjustment process. When expectations are “rational” and there are no distortions, public policy plays no useful role since the process of adjustment is efficient in the sense that the present discounted value of the economy’s output is maximized.
When expectations are not rational, appropriately designed policies may increase the efficiency of the adjustment process. If expectations are rational and if there are no other distortions in the economic system, then the adjustment path of the economy will be efficient. In such circumstances, government intervention into he adjustment process can only reduce the efficiency of this process and drive the economy to an inappropriate long-run equilibrium.
Non-rational expectations distort the adjustment process by inducing capital owners to assign incorrect values to units of capital located in different industries. This leads to a rate of adjustment which is too Taste or too slow, measures gallant ten criterion AT maximizing ten present discounted value of’ the economy’s final output. *The appropriate policy to correct the distortion created by non- rational expectations is a tax or subsidy which directly intervals the distortion.
Difficulty: several complex equations in sections to 5. 2. The Validity of the Long-run Hecklers-Olin Theorem in the Arcadian System By Attacks Chimera: Wasted University, Tokyo This paper applies Arcadian two-sector growth model to the two -country open economy to show that the long-run Hecklers-Olin theorem holds also in a Arcadian world.
In addition it is shown that, if two Arcadian countries that are different only in their demand parameters open trade, comparative advantage and the corresponding trade pattern at trade opening continue in the long run after the peeing of trade This paper, applying Burgomaster’s (1986) Arcadian two-sector grandmother to the two-country open economy, shows that, if two Arcadian countries that have identical (I)-(iv) and different factor proportions openhearted, the country that is relatively land (labor) abundant at the opening of trade remains relatively land (labor) abundant after the opening of trade and continues to export the land (labor)-intensive good, and does so also in the long run after the opening of trade, namely in the open-economy stationary state. This implies that the long-run Hecklers-Olin theorem firmly holds also in the Arcadian world. Thus, Burgomaster’s claim is false.
Burgomasters argues that is two Arcadian countries have identical Technology, the exogenously given long-run minimum rate of return, the constant food wage, demand parameter and different factor proportions (tallest one country is not in the tarry stationery state) open to trade Furthermore, it is also shown that, if two Arcadian countries that have identical (I)-(iii) and factor proportions and different (iv) open trade, comparative advantage and the corresponding trade pattern at the opening of trade occur and continue after opening trade, and do so also in the Eng run after the opening of trade. Hence, in this case also, Burgomaster’s (1986) claim that international taste difference can never induce long-run equilibrium trade in the Arcadian world is false. 1 . The Model And The Tartaric Economy Burgomaster’s (1986) two-factor (labor, L, and land, T), two-good (food, F, I. E. The system’s numerator, and manufactures, M) Arcadian system composed of three social classes (capitalists, workers, and landlords) assumes the standard constant- returns-to-scale neoclassical production functions. Under tarry situation,it is assumed that both goods are produced before and after international trade. Difficulty: Complex model 2.
The Open Economy This section considers free trade between two (home and foreign) Arcadian countries under which both goods are traded without any barriers such as transport costs or tariffs while both food wage funds, once invested, and labor are immobile between the countries. Static open-economy equilibrium By Walrus’s law, it is necessary and sufficient for world goods market equilibrium that one of the two goods markets, for instance that for manufactures, clears. Propositions Propositions . (Comparative advantage). This is the well-known result in the standard hurry of international trade. Here, the open-economy equilibrium relative price is in between the tartaric equilibrium relative prices. Also in the open-economy equilibrium, each country exports the good in which it has a comparative advantage. Propositions. (Trade Pattern).
Assumes that is technology is internationally identical, then the country that is relatively labor (land) abundant has a comparative advantage in the labor-intensive (land-intensive) good, and exports the good. Results of propositions Proposition 1 is a well known result in the standard theory of international trade. Part (I) of Proposition 2 implies that the static (shorthorn) Hecklers-Olin theorem holds also in a Arcadian world. (Note that the short-run Hecklers-Olin theorem never depends on international identity of w and r, which affect the rate of capital accumulation or labor growth. ) The remaining question is whether the long-run Hecklers-Olin theorem holds also in a Arcadian world.
Taking into account part (I) of Proposition 2, the question can be reduced to whether the ranking of factor proportions between the two countries at trade opening changes afterwards. Propositions. Path-dependence of the open-economy stationary states). There exists a continuum of open-economy stationary states, and which of these is attained depends on the relative proportion of labor at trade opening. Suppose that home country is relatively labor (land) abundant at trade opening, then this situation remains during the transition towards the corresponding open economy stationary state and also in the corresponding open-economy stationary state. Proposition 4 (The long-run Hecklers-Olin theorem). Suppose that two Arcadian countries open trade.
Then the country that is relatively labor (land) abundant at read opening remains relatively labor (land) abundant, continues to have a comparative advantage in the labor-intensive good, and continues to export the labor (land)-intensive good during the transition towards the corresponding open-economy stationary state, and so also in the corresponding open-economy stationary state. Proposition 5 (Difference of tastes and long-run trade). Suppose two Arcadian countries with t=t* an trade, then the country that has the higher (lower) y continues to export food (manufactures) after opening of trade and also in the corresponding open-economy stationary state. The comparative advantage at trade opening remains invariant after opening to trade and also in the corresponding open-economy stationary state. Thus, comparative advantage and the trade pattern at trade opening never change either during the transition to and in the corresponding open-economy stationary state.
Conclusions Proposition 4 implies that the Hecklers-Olin theorem is valid as a possible explanation of trade in both the short run and the long run in a Arcadian world. Proposition 5 implies that international taste difference can induce long-run equilibrium trade in a Arcadian world. Thus, Burgomaster’s (1986) views on the long- UN erects AT International Territories AT Arcadian world are false. Doctor prop rotors Ana tastes on trace In a 3. One Size Fits All? Hecklers-Olin Specialization in Global Production Although this was a difficult paper for me to fully understand, it was a very interesting read. The author Peter K. Shoot brings a valid point when examining the Heckler-Olin Model, as in it does not fully satisfy all counties and every scenario that my factor into production and trade.
Shoot suggest that in order to get a more accurate depiction of what factors into a country’s trading decision; certain specializations must be accounted for. He argues that traditional aggregates fail’ and brings the example of how countries relative endowments are being grouped together, in his example he uses low end radios, and high tech communication satellites’ these goods in traditional models would be placed in the same category. Grouping products in such a manner is said to CSCW actual patterns, and true causes behind movements in production. An interesting concept that Shoot developed was to use what he calls a multiple- cone equilibrium.