1. Labor and Capital Growth | |
Growth in a recession | During a recession, resources are not fully utilized. Proper economic policies may be adopted to stimulate economic growth. (US and Germany before WWII) German unemployment rose to about 30% at the height of the Great Depression (1932). Similarly, when resources are not mobile within an economy, infrastructure investment may increase mobility and stimulate economic growth (e.g., China, Roman Empire, US after WWII) These changes cause a movement toward the PPF. PPF can also expand through labor or capital growth. |
Neutral growth | The supply of a factor grows over time. Capital and labor
skills grow more rapidly in LDCs than in the US. How does factor growth
affect international trade and welfare of trading countries? Production: Labor and capital growth may increase the output of both the exportable and the importable by the same rate. This kind of growth is called neutral growth. For example, if K and L grow by 5% (^K = ^L = 5%), then neutral growth occurs because both the outputs of the exportable and the importable grow by the same rate. |
Ultra-export biased growth | If the production of the exportable grows faster than that of the importable (^y1 > ^y2 > 0) it is called export-biased growth. If the output of the exportable increases and that of the importable decreases (^y1 > 0 > ^y2) the growth is ultra-export biased. Ultra-import biased growth is similarly defined. The following figure shows neutral, import biased, export biased, ultra export biased and ultra import biased growth.
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war | Instead of shifting outward, sometimes the PPF contracts inwards. For instance, during World War II, significant amounts of resources were diverted away from civilian consumption goods to produce defense goods. North Korea is an example. |
consumption bias | The growth of a factor endowment does not necessarily
increase the output of every good. The growth of a factor does not necessarily increase exports. Figure below shows that export may decline, if a consumption bias exists. |
Small country | Factor growth in a small country always increases national income and welfare (because growth does not affect prices) |
Immiserizing Growth | If the terms of trade deteriorate sufficiently, growth can be immiserizing, lowering income and welfare. miserari = to pity in Latin. immiserize = to become poorer, pitiful. |
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2. Rybczynski Theorem | |
Assumption | Output prices are held constrant. Accordingly, factor prices are fixed. This deals with growth of a small open economy. input-output coefficients remain constant. |
Rybczynski Theorem | An increase in labor endowment increases the output of the labor-intensive industry and decreases the output of the other industry (L and the L-intensive industry are friends.) |
resource constraints | 1. The relationship between input and output aL1 y1 + aL2 y2 = L, (i.e., L1 + L2 = L) aK1 y1 + aK2 y2 = K. (i.e., K1 + K2 = K.) The aij's depend on w and r, not fixed as in Ricardian model. What combinations of outputs can be obtained from given resource constraints on capital and labor endowments? This is a system of two (nonlinear) equations involving two unknowns. Under plausible conditions, there is a unique solution. If the input-output coefficients are fixed parameters, it would take five minutes or so if they are not linear (as in the Ricardian model). Even if they are not linear, the system is solvable in principle (there are two unknowns and two equations). It would be a tedious procedure to find a solution in a non-linear system. But a graphical solution is instantaneous. |
2. The Rybczynski Theorem | The above equations show that the sum of the inputs used in the two industries must add up to the nation's input supplies. This relationship between inputs and outputs are shown below. An increase in the endowment of labor increases the production of labor intensive good and decreases the production of the other good (capital intensive good). The cone of diversification can be used to illustrate Rybczynski Theorem in the output spac e. An increase in the endowment of one factor results in either an ultra-export or import biased growth. Figure. The Rybczynski Theorem |
Rybczynski effects |
Example of ultra export biased growth When the supply of only one factor increases, two goods move in opposite directions. |