r w Factor-price determination in the 1 good, two-factor case

r w Factor-price determination in the 2x2 case (i)

r w Factor-price determination in the 2x2 case (ii)

r w Factor-price determination in the 2x2 case (iii)

r w w(p) r(p) Factor-price determination in the 2x2 case (iv)

r w w(p’) r(p’) The Stolper-Samuelson theorem

K L The Lerner diagram (i) unit-revenue isoquant Step 1: set technologies and good prices

K L wL/y 1 + rK/y 1 = 1 (unit isocost, common to both sectors) 1/w 1/r -w/r unit-revenue isoquant Profit-max. point for sector 1 Profit-max. point for sector 2 Step 2: determine profit-maximization points and factor prices The Lerner diagram (ii)

K L (w,r) wL/y 1 + rK/y 1 = 1 (unit isocost) 1/w 1/r -w/r unit-revenue isoquant Step 3: determine equilibrium factor intensities given factor prices The Lerner diagram (iii)

K L (w,r) wL/y 1 + rK/y 1 = 1 1/w 1/r -w/r This one can’t: out of the DC Step 4: identify diversification cone This endowment can be fully employed by a linear combination of industries 1 and 2’s factor intensities: in the DC The Lerner diagram (iv)

K L (w,r) wL/y 1 + rK/y 1 = 1 (unit isocost) 1/w 1/r -w/r The Lerner diagram with everything in it unit-revenue isoquant Profit-max. point for sector 1 Profit-max. point for sector 2

K L O V1’V1’ V2V2 Home diversification cone Home labor endowment Home capital endowment = V 2 ’ V2’V2’ The Rybczynski Theorem

K L K* O O’ L* V1V1 V2V2 Home diversification cone Home labor endowment Home capital endowment = V 2 The factor-price equalization set

r w Factor-price determination in the 2x2 case: Factor-intensity reversal More flexible technology In this cone, both industries are more labor intensive than in the other one

K L K* O O’ L* F i (factor content of trade) AD i = V i - F i (consumption) Home labor endowment Home capital endowment (home is cap- abundant) V i (production) The factor content of production and consumption

K L K* O O’ L* AD i = V i - F i (consumption) Home labor endowment Home capital endowment V i (production) The factor content of production and consumption: Trade surplus

y1y1 y2y2 Rybczynski effect in goods space “Rybczynski expansion path”

Chemicals Machinery Textiles Apparel K L y time y Chemicals Machinery Apparel y time y Textile Time path of capital accumulation Leontieff isoquants A B

y time Portable radios Satellites k1k1 k2k2 k3k3 k3k3 Intra-industry specialization

w S /w U H/L Skill premium under autarchy FPE set Skill premium after liberalization H/L w S /w U Stolper-Samuelson effects No FPE set Autarky

w S /w U H/L Skill premium under autarchy FPE set before the big 5’s entry Skill premium after liberalization H/L w S /w U FPE set after the big 5’s entry Asia in the 70s LA in the 90s LA’s liberalization vs. Asia’s: Wood’s argument

Defensive skill-biased technical change (Thoenig-Verdier) α (proportion of low-tech firms)  (unit hazard rate of innovations) α0α0 E0E0 “No-bias condition” R&D sector’s resource constraint Defensive technical change 00 V 1 down V S up meaning “per sector” (look at R&D resource constraint)

Defensive skill-biased technical change (Thoenig-Verdier) α (proportion of low-tech firms)  (unit hazard rate of innovations) α0α0 α1α1 E0E0 E2E2 “No-bias condition”: unaffected by trade opening R&D sector’s resource constraint: shifts up with trade opening before trade after trade 00 22 11 E1E1

i unit costs C(.) C*(.) C’(.) Production migrating to the South E0E0 E1E1 Production staying in the North C*’(.) Offshoring with a continuum of goods

MC Inverse demand MR MC + TC (for the foreign firm) pmpm

1/  n zero-profit condition Consumers’ budget constraint c (consumption per head) markup Monopolistic competition: fixed markup

1/  n zero-profit condition Consumers’ budget constraint c (consumption per head) markup Monopolistic competition: variable markup

firm 1 firm 2 firm 1 firm 2 no exports OLS estimate Elasticity to estimate (constant and common to all firms) Figure 5.1