Chapter 3 book notes
Factor-proportions theory: A country’s comparative advantage is determined by its initial resource endowments of the factors of production. A country will have a comparative advantage and choose to export goods whose production uses it’s relatively abundant factor of production.
Capital-to-labor ratio (K/L): The amount of capital per unit of labor used to produce a good.
[Wages in the U.S. / Rent in the U.S.] > [Wages in India / Rent in India]
Factor-price equalization theorem: International trade will reduce or equalize factor prices between countries. These changes may takes years or decades to occur.
Leontief Paradox: A study performed in 1954 to test the factor-proportions theory. It found that industries in the U.S. that had a trade surplus were labor intensive, while those with deficeits were capital intensive. Being that the U.S. was thought to have a comparative advantage in capital, this went against the theory. An accepted explanation of this paradox is that the study treated all labor the same; it did not account for skilled versus unskilled labor.
Two types of international trade not covered by the factor-proportions theory: Trade based on natural resources, and trade where a company will simultaneously export and import similar goods.