Class 5

Factor endowments assource

Factorendowments as source of
of
cost competitiveness
RodrigoWagner
 Big theme
Bigtheme

Why some firms

Wh fi i
insome
countries canbe
can be morecost
more cost
competitive than others?
others?
A couple of quick reminders
Acoupleofquickreminders
 Imagineapartialequilibriummodel
Market for potatoes in Idaho
MarketforpotatoesinIdaho
P ExportsofPotatoes SupplyofPotatoes
in Idaho
inIdaho
Pworld
International
price of
priceof
potatoes
Consumption
ofPotatoes
Demandof
d f
Potatoes
InIdaho

Production of Potatoes
ProductionofPotatoes

THEMANTRASHOWSUPAGAINANDAGAIN:Acountrywouldexportagood
iftheautarkypriceofthatgoodisbelowtheinternationalprice.
 Repeat the mantra with me:
A country exports a good if
the autarky price of the
good is lower than the
i
international
i l price(*),
i (*) andd
converselyy for imports
p

Butwhatmakesautarkyprices
But what makes autarky prices
differfromtheglobalprice?
(*)Rememberthatwhentheeconomyisopentheautarkypriceisjustathoughtexperiment.It
wouldbethepricehadtheeconomybeinautarky(closed,forcedtoconsumewhatitproduces)
 Whydocountriestrade?
b/c Autarky price InternationalPrice
b/cAutarkyprice International Price
Andwhythispricegap?
BecauseofDifferencesinPreferences/Demand
e.gJapan:disproportionateimporterofBeefTongue
e g Japan: disproportionate importer of Beef Tongue

BecauseofDifferencesinSupply/Production:
Because of Differences in Supply / Production:
Becauseitscheapertoproducethestuffsomewhereelseandbringit,
ratherthanproducingitathome.Soexportercountryhas:
RelativelyBettertechnologywiththesameinputs
RelativelyMoreabundantfactorsofproduction
LargerScaleEconomies
Isitalltradeaboutrelative
technological differences ?
technologicaldifferences?
WhatdidSwedenexportbackinthe1960s?
 LetsslookatSwedishhistory
Let look at Swedish history

Verycoolresultstovisualizetheproductive
Very cool results to visualize the productive
structureofacountry

AtlasofEconomicComplexity
(ExampleSweden)
WhatdidChileexport?(Shareovertime)
 Whydocountriestrade?
B/cthegoodinothercountryitscheaper!
/ h di h i h !
DifferencesinPreferences
Differences in Preferences
e.gJapan:disproportionateimporterofBeefTongue

DifferencesinSupply:
Because
Becauseit
itsscheapertoproducethestuffsomewhereelseandbringit,
cheaper to produce the stuff somewhere else and bring it
ratherthanproducingitathome.Soexportercountryhas:
RelativelyBettertechnologywiththesameinputs
Moreabundantfactorsofproduction Analyticaltrick:
LargerScaleEconomies wellvisitthese
forcesoneata
timebutreallife
isacombination
 Addinga2nd factor:
Where does a bowed out PPF come from?
WheredoesabowedoutPPFcomefrom?
Endowment:K=1000hoursofTractors;L=900workers

F ConstraintduetoWorkers
Lc +Lf<=L
Bothconstraintsneedtobe
Both constraints need to be
satisfiedatthesametime
for production to be feasible
forproductiontobefeasible

ConstraintduetoTractors
Constraint due to Tractors
Kc +Kf <=K

C
Laborintensive
vs. Capital
vs.Capital
intensive
goods?
d?
 Howdowemeasurefactorintensities?

Shareofcostsgoingtothatinput
Share of costs going to that input

w*L:Laborcosts (payroll,wagebill)
(p y , g )

Totalcosts
Total costs =w
w*LL+r
+ r*K
K+zX
+ zX
W;wage,LLabor;runit cost ofcapital,Kcapitalstock,z
price ofother inputs,Xquantity
p p , q y ofother inputs.
p

Labor intensity measured by cost:w

Laborintensity cost: w *L/TotalCost
L / Total Cost
 Atdifferent
factor prices
factorprices
[r/w],firmspick
adifferentinput
mix (K/L)
mix(K/L)
 Atdifferentrelativefactorprices[r/w],firmspicka
differentinputmix(K/L)toproducethesamegood

RFP
r/w
/
RFDtextile

RFQ
K/L
 LETSSTALKABOUTALCOHOL?
LET TALK ABOUT ALCOHOL?

TomHarkin

ChuckGrassley

Wh
WhySenatorsforIowawantedasubsidyto
S t f I t d b id t
Ethanol?NewPETHANOL =PETHANOL +SUBSIDY
Theyliketodrink?
The like to drink?
NoteEthanolismadeoutofcorn,andcornis
intensive in Iowan land
intensiveinIowanland
 A Question from the Pampas
AQuestionfromthePampas
IfthepriceofSoybeansgoesupincomparison
If the price of Soybeans goes up in comparison
toManufacturing,whatdoyouthinkwould
happen to land prices in Argentina? And to
happentolandpricesinArgentina?Andto
theamountofSoybeanproduced
(a) up up
(a)up,up
(b)up,downb/cismoreexpensive
(c)down,up,
( )
(d)down,down
,
 Takingstock:
g
Sametechnologybutdifferentendowments

Factorprices(rforKandwforL).

If
Ifpriceofagoodgoesup:factorintensivelyusedis
i f d f i i l di
valuedmore.
e.g.
e.g.Asthepriceofcornincreases,landincornproducing
As the price of corn increases, land in corn producing
States(likeIowa)increaseitsvalue

If
Ifendowmentofafactorincreases,moreoutputinthe
d t f f t i t t i th
goodthatusesitintensively
e.g.MoreUSFruitproductionifUSincreasesLendowment
e.g. More US Fruit production if US increases L endowment
 Fig.415:SkillIntensityandthePatternofU.S.
p
ImportsfromTwoCountries

Source: JohnRomalis,FactorProportionsandtheStructureofCommodityTrade,AmericanEconomicReview,March
Copyright2009Pearson
2004.
AddisonWesley.Allrights 421
reserved.
 NaturalAdvantage is NOTenough
Coppermaded pipelinesMADECO
l

MADECO(ManufacturasdeCobre)is acompany
that used to be devoted to the production of
pipesfor water or gas;made out ofCopper.
Ofcourse
Of course it
itss intensive inCopper
in Copper !
andChileis Abundant inCopper.

But this company just closed (its copper

operations),in20132014.
It had access to good sources offinance andchile
hasgood copper.Why did it close?(link)
 TeachingPlanfortoday
g y
Abundant andcheap inputs
assource
as source ofcomparaive
of comparaive advantage

Buttheyarenottheonlydeterminant!

NEXTClass:EconomiesofScaleassourceof
Advantage