2. 1 Ch. 4: Resources, Comparative Advantage, and Income Distribution

3. 2 Evolution of Trade Theories Adam Smith used differences in labor productivity to explain why trade occurs. Adam Smith used differences in labor productivity to explain why trade occurs. Ricardo extended the productivity differences idea to show why trade benefits both the more productive and the less productive countries. Ricardo extended the productivity differences idea to show why trade benefits both the more productive and the less productive countries.

4. 3 Evolution of Trade Theories While trade is partly explained by differences in labor productivity, it also can be explained by differences in resources across countries. While trade is partly explained by differences in labor productivity, it also can be explained by differences in resources across countries. The Heckscher-Ohlin theory argues that international differences in labor, labor skills, physical capital or land (factors of production) create productive differences that explain why trade occurs. The Heckscher-Ohlin theory argues that international differences in labor, labor skills, physical capital or land (factors of production) create productive differences that explain why trade occurs.

5. 4 Evolution of Trade Theories Heckscher-Ohlin theory allows for all the factors to be freely employed in every industry. Heckscher-Ohlin theory allows for all the factors to be freely employed in every industry. H-O theory is also called “factor-proportions” theory because it allows different proportions of K/L ratio to be used in the production process. H-O theory is also called “factor-proportions” theory because it allows different proportions of K/L ratio to be used in the production process. As new theories are developed, old theories become a special case of the new theory. As new theories are developed, old theories become a special case of the new theory.

6. 5 Neoclassical Production In H-O, labor and capital can be substituted to produce a constant unit of output. In H-O, labor and capital can be substituted to produce a constant unit of output. Each firm will try produce the highest output with given amount of outlay by changing the proportions of capital and labor used. Each firm will try produce the highest output with given amount of outlay by changing the proportions of capital and labor used. Typically, technologies in different industries employ different ratios of capital and labor in spite of the fact that the prices of inputs they face are the same. Typically, technologies in different industries employ different ratios of capital and labor in spite of the fact that the prices of inputs they face are the same.

7. 6 Typical Firm Behavior Terrain Labor FOOD CLOTH Q=1 Q=2 Q=3 Q=2 Q=3 Q=1 w/r

8. 7 Factor Prices, Factor Proportions In the previous example, the ratio of wages to rental rate of territory is the same for all the firms in clothing and food. In the previous example, the ratio of wages to rental rate of territory is the same for all the firms in clothing and food. Firms in food industry use a higher land/labor ratio than firms in clothing. Firms in food industry use a higher land/labor ratio than firms in clothing. a LC /a TC > a LF /a TF a LC /a TC > a LF /a TF Or a LC /a LF > a TC /a TF Or a LC /a LF > a TC /a TF Considering the total resources used in each industry, cloth production is labor intensive and food production is land intensive if L C /T C > L F /T F. Considering the total resources used in each industry, cloth production is labor intensive and food production is land intensive if L C /T C > L F /T F.

9. 8 Output Prices Assuming that all the firms operate in competitive environment, their unit cost will be equal to the price they charge. Assuming that all the firms operate in competitive environment, their unit cost will be equal to the price they charge.

10. 9 Increase in r (Cost of Land) TT L LFOOD CLOTH Q=1 Q=3 Q=1 w/r 1 w/r 2

11. 10 Increase in r (Cost of Land) All the firms react to an increase in cost of land the same way: substitute more labor for capital. All the firms react to an increase in cost of land the same way: substitute more labor for capital. Because land is the intensive factor in food, higher cost of land will raise the price of food compared to cloth. Because land is the intensive factor in food, higher cost of land will raise the price of food compared to cloth. Or labor is relatively cheaper so cloth will be relatively cheaper. Or labor is relatively cheaper so cloth will be relatively cheaper.

12. 11 Expansion Path TT L LFOOD CLOTH Q=1 Q=2 Q=3 Q=2 Q=3 Q=1

13. 12 PPF If more food is to be produced, both land and labor will be taken away from cloth. If more food is to be produced, both land and labor will be taken away from cloth. First, excess land will be taken, resulting in a small drop of cloth production. First, excess land will be taken, resulting in a small drop of cloth production. As more and more resources are taken away, opportunity cost of food (cloth sacrificed) rises. As more and more resources are taken away, opportunity cost of food (cloth sacrificed) rises.

14. 13 PPF

15. 14 What to Produce PPF shows options given “technology.” PPF shows options given “technology.” Any point on the PPF is efficient. Any point on the PPF is efficient. How to choose “the” point? How to choose “the” point? What is the meaning of the slope of PPF? What is the meaning of the slope of PPF? How to draw a budget line and what does the slope show? How to draw a budget line and what does the slope show?

16. 15 CLOTH FOOD Y/P F Y/P C P C /P F PPF

17. 16 Change in r If r increases, w/r falls. If r increases, w/r falls. Both industries prefer to lower their Land/Labor ratios (increase L/T ratios). Both industries prefer to lower their Land/Labor ratios (increase L/T ratios). Since food is land intensive, P F will go up. Since food is land intensive, P F will go up. What happened to price ratios? Where are we on the PPF? What happened to price ratios? Where are we on the PPF? Why did Food production INCREASE? Why did Food production INCREASE?

18. 17 Change in r Why did Food production INCREASE? Why did Food production INCREASE? What happens to the Marginal Product of Labor if less Land is used (remember Land/Labor (T/L) ratios fell)? What happens to the Marginal Product of Labor if less Land is used (remember Land/Labor (T/L) ratios fell)? What happens to the Marginal Product of Land if more labor is employed? What happens to the Marginal Product of Land if more labor is employed? What happens to the earnings of labor and landowners? What happens to the earnings of labor and landowners?

19. 18 Allocation of Land and Labor Given the prices of cloth and food, the competitive economy will choose the point on the PPF where the opportunity cost of cloth in terms of food is Pc/Pf. Given the prices of cloth and food, the competitive economy will choose the point on the PPF where the opportunity cost of cloth in terms of food is Pc/Pf. Given the price ratios, the relative factor prices are also determined, indicating a specific choice of land/labor ratio for each industry. Given the price ratios, the relative factor prices are also determined, indicating a specific choice of land/labor ratio for each industry.

20. 19 Allocation of Labor and Land T L 0 T L 0 Labor in Cloth Labor in Food FoodFood ClothCloth The slope is the Land/Labor ratio for Food.

21. 20 Increase in Land T L 0 T L 0 Labor in Cloth Labor in Food FOODFOOD CLOTHCLOTH

22. 21 Increase in Land More land in this country will make food industry employ both more labor and land. More land in this country will make food industry employ both more labor and land. If prices of food relative to cloth remained the same, keeping factor prices and factor proportions the same, food sector (land- intensive) will expand and cloth sector (labor-intensive) will shrink. If prices of food relative to cloth remained the same, keeping factor prices and factor proportions the same, food sector (land- intensive) will expand and cloth sector (labor-intensive) will shrink.

23. 22 Increase in Land in PPF F C

24. 23 Relative Product Prices and Relative Factor Prices A sudden increase in land, ceteris paribus, will make land relatively cheaper than labor. A sudden increase in land, ceteris paribus, will make land relatively cheaper than labor. More land will make labor more productive and hence raise wages. More land will make labor more productive and hence raise wages. Higher w/r ratio will raise the prices of cloth relative to food. Higher w/r ratio will raise the prices of cloth relative to food. Income distribution will change in favor of labor. Income distribution will change in favor of labor.

25. 24 Two Countries C C F F Given the same prices, which country produces RELATIVELY more cloth and which one relatively more food? As a result, which country’s relative supply curve (F/C) would be further to the right? Price is (P F /P C ). ForeignHome

26. 25 Supply, Demand, Prices Pf/Pc F/C Foreign Home If tastes and incomes were the same in both countries, price of food would be relatively higher in Home and relatively lower in Foreign. Home would export cloth and Foreign would export food. Free trade would move Pf/Pc between the two price levels. Home is relatively abundant in labor and Foreign is relatively abundant in land.

27. 26 Price Lines in Both Countries F F C The country at left has a lower Pf/Pc than the country at right. The slope of the tangent line is equal to Pf/Pc. C ForeignHome

28. 27 Price Lines with Trade F F C The world price changes the production in both countries. The trade triangle should match both countries if these are the only countries trading. C ForeignHome

29. 28 Trade in the Heckscher-Ohlin Model

30. 29 Price Changes Free trade will raise the price of the product produced by the abundant factor and will lower the price of the product produced by the scarce factor. Free trade will raise the price of the product produced by the abundant factor and will lower the price of the product produced by the scarce factor. The country abundant in land sees an increase in the price of food and a drop in the price of cloth. The country abundant in land sees an increase in the price of food and a drop in the price of cloth. The country abundant in labor sees an increase in the price of cloth and a drop in the price of food. The country abundant in labor sees an increase in the price of cloth and a drop in the price of food.

31. 30 Income Distribution Owners of land in the land-abundant country will benefit. Owners of land in the land-abundant country will benefit. Labor in the land-abundant country will lose. Labor in the land-abundant country will lose. Owners of land in the cloth specialized country will lose. Owners of land in the cloth specialized country will lose. Labor in the cloth specialized country will benefit. Labor in the cloth specialized country will benefit.

32. 31 Factor Price Equalization There is a one-to-one correspondence between w/r and Pc/Pf. As Pc/Pf becomes the same for both countries, so should w/r. There is a one-to-one correspondence between w/r and Pc/Pf. As Pc/Pf becomes the same for both countries, so should w/r. The country that exports the product with the abundant factor sees a higher return for that factor. Before trade, abundant factor got the lower return. The country that exports the product with the abundant factor sees a higher return for that factor. Before trade, abundant factor got the lower return. Scarce factor got the higher return before trade and the lower return after trade. Scarce factor got the higher return before trade and the lower return after trade.

33. 32 Factor Price Equalization Trade makes two separate markets become one. Trade makes two separate markets become one. The country with the relatively abundant labor exports labor-intensive products. It is similar to exporting labor itself. The country with the relatively abundant labor exports labor-intensive products. It is similar to exporting labor itself. The country with the relatively abundant land, exports land-intensive goods. The country with the relatively abundant land, exports land-intensive goods. The unified market makes the prices of labor and capital in both countries to converge. The unified market makes the prices of labor and capital in both countries to converge.

34. 33 Testing Factor Price Equalization Contrary to the prediction of the model, factor prices vary across the countries. Contrary to the prediction of the model, factor prices vary across the countries. Should we scrap the model? What characteristics of the model lead to equalization? Should we scrap the model? What characteristics of the model lead to equalization? Both countries produce both goods. Both countries produce both goods. Technologies in both countries are the same. Technologies in both countries are the same. Prices of products become the same in both countries. Prices of products become the same in both countries.

35. 34 Divergent Resource Endowments Convergence happens when resource endowments are similar and the relative differences force each country to move more toward the specializing in abundant factor using product. Convergence happens when resource endowments are similar and the relative differences force each country to move more toward the specializing in abundant factor using product. If endowments are very divergent, each country would already specialize in a different product and trade would not equalize the factor prices. If endowments are very divergent, each country would already specialize in a different product and trade would not equalize the factor prices. Factor prices need not be equalized between countries with radically different ratios of capital to labor or of skilled to unskilled labor. Factor prices need not be equalized between countries with radically different ratios of capital to labor or of skilled to unskilled labor.

36. 35 Different Technologies of Production A country with a far superior technology in both products will have higher prices of both factors compared with the country with low technology. A country with a far superior technology in both products will have higher prices of both factors compared with the country with low technology. Factor price convergence will not take place if technologies are very different. Factor price convergence will not take place if technologies are very different.

37. 36 Convergence of Prices If prices in both countries do not become the same, factor prices will not, either. If prices in both countries do not become the same, factor prices will not, either. Non-traded goods, transportation costs, tariffs, quotas all keep prices from converging. Non-traded goods, transportation costs, tariffs, quotas all keep prices from converging.

38. 37 Short vs. Long Run The model says wages and land rents will be the same no matter which industry employs them. This is the long-run expectation. The model says wages and land rents will be the same no matter which industry employs them. This is the long-run expectation. In the short run, both factors in the expanding industry may benefit and those in the shrinking industry suffer (Pc/Pf changes). In the short run, both factors in the expanding industry may benefit and those in the shrinking industry suffer (Pc/Pf changes). Politics is a short run phenomenon. Politics is a short run phenomenon.

39. 38 Factor Price Equalization? Real wages for unskilled labor (10 th percentile of workers) rose only 0.2% between 1979 and 2001. Real wages for unskilled labor (10 th percentile of workers) rose only 0.2% between 1979 and 2001. Real wages for highly skilled labor (95 th percentile of workers) rose 29%. Real wages for highly skilled labor (95 th percentile of workers) rose 29%. College premium was 21% in 1979; 44% in 2002. College premium was 21% in 1979; 44% in 2002. If US exports highly skilled labor products and imports unskilled labor products, then H-O theory prediction seems to hold. If US exports highly skilled labor products and imports unskilled labor products, then H-O theory prediction seems to hold.

40. 39 Factor Price Equalization Does Not Apply to US Experience H-O theory predicts that prices of goods will change before prices of factors. H-O theory predicts that prices of goods will change before prices of factors. Goods that are exported will experience a rise in price. Goods that are exported will experience a rise in price. Studies fail to show any increase in the prices of skill-intensive products. Studies fail to show any increase in the prices of skill-intensive products.

41. 40 Factor Price Equalization Does Not Apply to US Experience H-O says the price of the abundant factor will increase and the price of the scarce factor will decrease. H-O says the price of the abundant factor will increase and the price of the scarce factor will decrease. There is no indication that the return to skilled labor in NIEs has been falling; in fact, it has been increasing. There is no indication that the return to skilled labor in NIEs has been falling; in fact, it has been increasing.

42. 41 Factor Price Equalization Does Not Apply to US Experience US trade with LDCs is very small percentage of GDP. In 1990, manufactured imports of US from LDCs was under 2% of GDP. US trade with LDCs is very small percentage of GDP. In 1990, manufactured imports of US from LDCs was under 2% of GDP. Labor content of both the exports and imports constitute a very small percent of total labor; it is not possible to have such a large impact on the wages. Labor content of both the exports and imports constitute a very small percent of total labor; it is not possible to have such a large impact on the wages.

43. 42 What Is Responsible for the GAP? Technological change. Technological change.

44. 43 Trade and Benefits Does trade increase the total consumption of the people in a country? Does trade increase the total consumption of the people in a country? How do you show this in a PPF and price line? How do you show this in a PPF and price line? Ideally, every one can be better off. Ideally, every one can be better off.

45. 44 Trade and Benefits Different groups, different industries benefit and lose from trade. Different groups, different industries benefit and lose from trade. But wages and rents will be the same across the industries in the long run, helping exporters and hurting importers. But wages and rents will be the same across the industries in the long run, helping exporters and hurting importers. Is there enough surplus to make both the exporters and importers better off? Is there enough surplus to make both the exporters and importers better off?

46. 45 Trade and Income Distribution There is a political bias in trade politics: potential losers from trade are better politically organized than the winners from trade. There is a political bias in trade politics: potential losers from trade are better politically organized than the winners from trade. Losses are usually concentrated among a few, but gains are usually dispersed among many. Losses are usually concentrated among a few, but gains are usually dispersed among many. Each of you pays about $8/year to restrict imports of sugar, and the total cost of this policy is about $2 billion/year. Each of you pays about $8/year to restrict imports of sugar, and the total cost of this policy is about $2 billion/year. The benefits of this program total about $1 billion, but this amount goes to relatively few sugar producers. The benefits of this program total about $1 billion, but this amount goes to relatively few sugar producers.

47. Unemployment? How much unemployment can be traced back to trade? How much unemployment can be traced back to trade? From 1996 to 2008, only about 2.5% of involuntary displacements stemmed from import competition or plants moved overseas. From 1996 to 2008, only about 2.5% of involuntary displacements stemmed from import competition or plants moved overseas. Unemployment is primarily a macroeconomic problem that rises during recessions. Unemployment is primarily a macroeconomic problem that rises during recessions. The best way to reduce unemployment is by adopting macroeconomic policies to help the economy recover, not by adopting trade protection. The best way to reduce unemployment is by adopting macroeconomic policies to help the economy recover, not by adopting trade protection. 46

48. 47 Import Penetration and Unemployment

49. 48 Leontief Paradox Wassily Leontief (Nobel 1973) tried to test Hecksher-Ohlin theorem. Wassily Leontief (Nobel 1973) tried to test Hecksher-Ohlin theorem. H-O says countries export products embodying the abundant factor. H-O says countries export products embodying the abundant factor. Leontief pioneered in creating input- output tables; he had the data on inputs used for outputs. Leontief pioneered in creating input- output tables; he had the data on inputs used for outputs.

50. 49 K and L Required to Produce $1 million

51. 50 K and L Required to Produce $1 million of US Exports and Import Replacements

52. 51 Explaining Leontief Paradox? When exports and imports are tested according to labor skills, the US is seen to export more skilled labor intensive products. When exports and imports are tested according to labor skills, the US is seen to export more skilled labor intensive products. New products usually are more high-skill labor-intensive than mature manufacturing, which are capital-intensive. New products usually are more high-skill labor-intensive than mature manufacturing, which are capital-intensive. Baldwin’s numbers: Baldwin’s numbers: Education per worker 9.9 years for imports, 10.1 for exports. Education per worker 9.9 years for imports, 10.1 for exports. Engineers and scientists 1.89% for imports, 2.55% for exports. Engineers and scientists 1.89% for imports, 2.55% for exports.

53. 52 Further Tests H-O predicts that a country will export its abundant factor. H-O predicts that a country will export its abundant factor. In general, exports of countries should include products embodied with their abundant factor. In general, exports of countries should include products embodied with their abundant factor. If a country’s endowment as a share of world endowment is compared to its income as a share of world income, then it will export the factor if the ratio is greater than one. If a country’s endowment as a share of world endowment is compared to its income as a share of world income, then it will export the factor if the ratio is greater than one.

54. 53 H-O Test Using Global Data Source: H.P. Bowen, E.L. Leamer, and L. Sveikauskas, Multicountry, Multifactor Tests of the Factor Abundance Theory,” American EconomicReview 77 (December 1987), pp. 791-809.

55. 54 H-O Tests of North-South Trade When trade between two countries with very different endowments, like North and South, is evaluated, it conforms to the predictions of H-O. When trade between two countries with very different endowments, like North and South, is evaluated, it conforms to the predictions of H-O. However, the trade between the developed countries and the LDCs constitute 10% of world trade. However, the trade between the developed countries and the LDCs constitute 10% of world trade.

56. 55 Technological Differences The basic H-O relies on differences on factor endowments and assumes same technology available to all countries. The basic H-O relies on differences on factor endowments and assumes same technology available to all countries. For example, that would mean that China would export its labor to US much more than the numbers indicate. For example, that would mean that China would export its labor to US much more than the numbers indicate. If technologies differ, then US might have an “effective” labor force much larger than the raw data indicates. If technologies differ, then US might have an “effective” labor force much larger than the raw data indicates. US has ¼ of world income but 1/20 of world labor. US has ¼ of world income but 1/20 of world labor. China has 1/35 of world income but 1/7 of world labor. China has 1/35 of world income but 1/7 of world labor.

57. 56 Success of H-O Empirical studies have given less than full support to H-O. Empirical studies have given less than full support to H-O. We need to utilize some other model to explain trade patterns between similar countries. We need to utilize some other model to explain trade patterns between similar countries. If H-O can predict trade patterns relatively well between North and South, then we can use the income distributional predictions in that case, as well. If H-O can predict trade patterns relatively well between North and South, then we can use the income distributional predictions in that case, as well.

58. 4-57 Movements in Factors of Production Movements in factors of production include Movements in factors of production include labor migration labor migration the transfer of financial assets through international borrowing and lending the transfer of financial assets through international borrowing and lending transactions of multinational corporations involving direct ownership of foreign firms transactions of multinational corporations involving direct ownership of foreign firms Like movements of goods and services (trade), movements of factors of production are politically sensitive and are often restricted. Like movements of goods and services (trade), movements of factors of production are politically sensitive and are often restricted.

59. 4-58 International Labor Mobility Why does labor migrate and what effects does labor migration cause? Why does labor migrate and what effects does labor migration cause? Workers migrate to wherever wages are highest. Workers migrate to wherever wages are highest. Consider movement of labor across countries instead of across sectors. Consider movement of labor across countries instead of across sectors. Suppose two countries produce one non-traded good (food) using two factors of production: Suppose two countries produce one non-traded good (food) using two factors of production: Land cannot move across countries but labor can. Land cannot move across countries but labor can.

60. 4-59 International Labor Mobility (cont.) Figure 4-13 finds the equilibrium wage and labor allocation with migration across countries. Figure 4-13 finds the equilibrium wage and labor allocation with migration across countries. Similar to how Figure 4-4 determined the equilibrium allocation of labor between sectors. Similar to how Figure 4-4 determined the equilibrium allocation of labor between sectors. Start with OL 1 workers in Home earning a lower real wage (point C) than the L 1 O * workers in Foreign (point B). Start with OL 1 workers in Home earning a lower real wage (point C) than the L 1 O * workers in Foreign (point B). Lower wage due to less land per worker (lower productivity). Lower wage due to less land per worker (lower productivity). Workers in the home country want to migrate to the foreign country where they can earn more. Workers in the home country want to migrate to the foreign country where they can earn more.

61. 4-60 International Labor Mobility (cont.) If no obstacles to labor migration exist, workers move from Home to Foreign until the purchasing power of wages is equal across countries (point A), with OL 2 workers in Home and L 2 O * workers in Foreign. If no obstacles to labor migration exist, workers move from Home to Foreign until the purchasing power of wages is equal across countries (point A), with OL 2 workers in Home and L 2 O * workers in Foreign. Emigration from Home decreases the supply of labor and raises real wage of the workers who remain there. Emigration from Home decreases the supply of labor and raises real wage of the workers who remain there. Workers who start in the Home country earn more due to emigration regardless if they are among those who leave. Workers who start in the Home country earn more due to emigration regardless if they are among those who leave. Immigration into Foreign increases the supply of labor and decreases the real wage there. Immigration into Foreign increases the supply of labor and decreases the real wage there. Wages do not actually equalize, due to barriers to migration such as policies restricting immigration and natural reluctance to move. Wages do not actually equalize, due to barriers to migration such as policies restricting immigration and natural reluctance to move.

62. 4-61 Fig. 4-13: Causes and Effects of International Labor Mobility

63. 4-62 International Labor Mobility (cont.) Labor migration increases world output. Labor migration increases world output. The value of foreign output rises by the area under its MPL * curve from L 1 to L 2 The value of foreign output rises by the area under its MPL * curve from L 1 to L 2 The value of domestic output falls by the area under its MPL curve from L 2 to L 1 The value of domestic output falls by the area under its MPL curve from L 2 to L 1 World output rises because labor moves to where it is more productive (where wages are higher). World output rises because labor moves to where it is more productive (where wages are higher). The value of world output is maximized when the marginal productivity of labor is the same across countries. The value of world output is maximized when the marginal productivity of labor is the same across countries.

64. 4-63 International Labor Mobility (cont.) Workers initially in Home benefit while workers in Foreign are hurt by inflows of other workers. Workers initially in Home benefit while workers in Foreign are hurt by inflows of other workers. Landowners in Foreign gain from the inflow of workers decreasing real wages and increasing output. Landowners in Foreign gain from the inflow of workers decreasing real wages and increasing output. Landowners in Home are hurt by the outflow of workers increasing real wages and decreasing output. Landowners in Home are hurt by the outflow of workers increasing real wages and decreasing output.

65. 4-64 International Labor Mobility (cont.) Does migration lead to the wage changes predicted? Does migration lead to the wage changes predicted? Table 4-1 shows that real wages in 1870 were much higher in destination countries than in origin countries. Table 4-1 shows that real wages in 1870 were much higher in destination countries than in origin countries. Up until the eve of World War I in 1913, wages rose faster in origin countries than in destination countries (except Canada). Up until the eve of World War I in 1913, wages rose faster in origin countries than in destination countries (except Canada). Migration moved the world toward more equalized wages. Migration moved the world toward more equalized wages.

66. 4-65 Table 4-1

67. 4-66 International Labor Mobility (cont.) In the early 20 th century, share of immigrants in the U.S. increased dramatically. In the early 20 th century, share of immigrants in the U.S. increased dramatically. Vast immigration from Eastern and Southern Europe. Vast immigration from Eastern and Southern Europe. Tight restrictions on immigration imposed in the 1920s. Tight restrictions on immigration imposed in the 1920s. Immigrants were a minor force in the U.S. by the 1960s. Immigrants were a minor force in the U.S. by the 1960s. New wave of immigration began around 1970. New wave of immigration began around 1970. Mostly from Latin America and Asia. Mostly from Latin America and Asia. As of 2006, 15.3% of the U.S. labor force foreign-born. As of 2006, 15.3% of the U.S. labor force foreign-born.

68. 4-67 Fig. 4-14: Immigrants as a Percentage of the U.S. Population

69. 4-68 Immigration and the U.S. Economy The largest increase in recent immigration occurred among workers with the lowest education levels, making less educated workers more abundant. The largest increase in recent immigration occurred among workers with the lowest education levels, making less educated workers more abundant. possibly reduced wages for native-born workers with low education levels while raising wages for the more educated possibly reduced wages for native-born workers with low education levels while raising wages for the more educated widening wage gap between less educated workers and highly educated workers. widening wage gap between less educated workers and highly educated workers.

70. 4-69 Summary 1. International trade often has strong effects on the distribution of income within countries -- produces losers as well as winners. 2. Income distribution effects arise for two reasons: Factors of production cannot move costlessly and quickly from one industry to another. Factors of production cannot move costlessly and quickly from one industry to another. Changes in an economy’s output mix have differential effects on the demand for different factors of production. Changes in an economy’s output mix have differential effects on the demand for different factors of production.

71. 4-70 Summary (cont.) 3. International trade affects the distribution of income in the specific factors model. Factors specific to export sectors in each country gain from trade, while factors specific to import-competing sectors lose. Factors specific to export sectors in each country gain from trade, while factors specific to import-competing sectors lose. Mobile factors that can work in either sector may either gain or lose. Mobile factors that can work in either sector may either gain or lose.

72. 4-71 Summary (cont.) 4. Trade nonetheless produces overall gains in the sense that those who gain could in principle compensate those who lose while still remaining better off than before. 5. Most economists would prefer to address the problem of income distribution directly, rather than by restricting trade. 6. Those hurt by trade are often better organized than those who gain, causing trade restrictions to be adopted.

73. 4-72 Summary (cont.) 7. Labor migrates to countries with higher labor productivity and higher real wages, where labor is scarce. Real wages fall due to immigration and rise due to emigration. Real wages fall due to immigration and rise due to emigration. World output increases. World output increases. 8. Real wages across countries are far from equal due to differences in technology and due to immigration barriers.