By Robert C. Feenstra
Brand new and extremely transparent presentation of the mainstream conception of foreign exchange.
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Extra info for Advanced International Trade: Theory and Evidence
Indeed, it is only very recently that researchers have begun to use data on foreign technologies to test the HO model, as we will describe later in the chapter. S. technology to calculate the amount of labor and capital used in imports. Does this invalidate the test of the HO model? Not really, because recall that an assumption of the HO model is that technologies are the same across countries. S. technology to measure the labor and capital used in imports. If we find that this null hypothesis is rejected, then one explanation would be that the assumption of identical technologies is false.
The term AY equals the demand for factors in country i. Analogous to the full-employment conditions studied i i i in chapter 1, AY equals the endowments of country i, which we write as AY = V . Turning to i AD , this terms is simplified by using our assumption of identical and homothetic tastes. Since product prices are equalized across countries by free trade, it follows that the consumption i i w vectors of all countries must be proportional to each other. We shall write this as D = s D , w i where D denotes the world consumption vector and s is the share of country i in world i i w i consumption.
11. With the initial endowments (L, K ) , the equilibrium outputs are y1 and y2. Now suppose that the labor endowment increases to L’ > L, with no change in the capital endowment. Starting from the endowments (L’,K), the only way to add up multiples of (a1L, a1K) and (a2L, a2K) and obtain the endowments is to 12 As an exercise, show that L1 / K1 > L / K > L 2 / K 2 ⇔ λ1L > λ1K and λ 2 K > λ 2 L . This is done by multipying the numerator and denominator in the first set of inequalities by like terms.
Advanced International Trade: Theory and Evidence by Robert C. Feenstra