International Economics

Lecture 4

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 Production Volume
• Relationship between production levels and factor availability

Rybczynski proposition
In a neoclassical framework, 2 goods, 2 factors, given nal good
prices, an increase in the supply of a factor of production results in
an increase in the output of the nal good that uses that factor
more intensively and a reduction of the output of other good.
That is: Assuming capital-intensive manufacturing...

SL ↑⇒ F ↑, M ↓

SK ↑⇒ M ↑, F ↓

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 Edgeworth Box

• Useful tool to analyse the relationship between the available

factor of production and the quantity of output produced.

• Construction

• In equilibrium, all inputs must be used in M or F

Km + K f = K; Lm + L f = L

• Once K is know, it is sucient to know Km to calculate K f

• Similarly for L

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Isoquants for Manufactures (M) and Food (F)
αm > α f

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Isoquants for F and M
αm > α f

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The Edgeworth box
Construction of the box

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The Edgeworth box
K = L = 5, αm = 0.7, α f = 0.3

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 Ecient input combinations
Contract curve K = L = 5, αm = 0.7, α f = 0.3

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 Contract curve
Curvature

• If αm = α f , the contract curve is the diagonal

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 Distribution of L and K

• Three steps

• Given (pm , p f ), we can determine (w, r) using FPE

• Known (w, r), we can derive optimal KL for M and F
• Note KL do not change, since (pm , p f ) do not change
• using the full employment conditions and the capital/labour
ratios, we can determine the allocation of capital and labour in
the two sectors and the production levels in both sectors. (see
next slide)

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Rybczynski

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 Rybczynski

K
K
L = λm KLmm + (1 − λm ) L ff
where λm = Lm /L (share of labour in manufacturing)
K Kf K
• since m ,
Lm L f do not change, changes in L occur only through
changes in λm
• Jones Magnication applies here to the output space.

if K̃ > L̃,then M̃ > K̃ > L̃ > F̃,

if K̃ < L̃,then M̃ < K̃ < L̃ < F̃,

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 Empirical evidence
Russian immigrants to Israel (Gandal et al. 2000)
After 1989, Russians migrants increased Israel's population by 11% and workforce by
14%; this high inux of SC/CG did not depress wages and high skill workers wages
increased
LTH (Less than High School), HG (High School Graduate), SC (Some College), CG (College Graduate);

Why?
• Since Israel is a small open economy, Rybcynsky explains constant wage rate.
• Changes in technology may be the explanation
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