academic
publications
trade theory with
three productive factors
My research has focused on increasing
the flexibility and application of factor proportions models of international
or regional production and trade. The
underlying assumptions are competitive pricing of outputs and full employment.
Endogenous trade and factor
proportions production, International
Journal of Economics and Finance, 2007, 171-7
This paper
integrates neoclassical offer curves and the theory of production, introducing
utility maximization and trade levels into the comparative static factor
proportions model. Marshall meets Heckscher,
Ohlin, and Samuelson.
General
equilibrium production with constant elasticity of substitution, Keio Economic Studies, 2007, forthcoming
Properties of general equilibrium production models
are greatly simplified under the assumption of CES production.
Duopoly quotas and
relative import quality, with Randy Beard, International
Review of Economics and Finance, #2, 2003
A quota on
imports in an international duopoly is generally thought to lead to import
quality upgrading but the opposite may occur when there is a low volume of high
quality imports. Quotas lower the
quality of domestic products. Import
quality may fall in absolute terms but there is always relative import quality
upgrading.
Factor intensity as
Euclidean distance, Keio Economic Studies, #1, 2003, 1-7
Factor intensity is defined when there are either two factors or two
products. This paper generalizes the
definition of factor intensity to the situation of many factors and many
products. Distance factor intensity is
the Euclidean distance from the unit value of a factor to its intersection with
an intensity ray hyperplane. Factor intensity distance is useful in
applied factor proportions theory.
This chapter examines how well factor intensity and the intensity price
link perform under various parametric relaxations of assumptions about
industrial structure and factor markets.
There is a tendency to discount the intensity price link because of the
restrictive conditions of the competitive model. Parametric relaxations reveal a robust Stolper-Samuelson link.
Price taking monopolies
in small open economies, Open Economies Review, April 2002, 205-9
A monopoly exporter or importer in a small open economy is a price taker
in the world market searching for the quantity that maximizes profit. This model describes various resource
industries. The comparative static
effects of changing prices and factor endowments on monopoly profit and output
depend on factor intensity and substitution.
Definitions of
factor abundance and the factor content of trade, Open Economies
Review, October 1999, 385-394
Factor abundance is a simple concept when there are only two factors or
two countries. Beyond this blackboard
example, defining or measuring factor abundance remains a challenge. Definitions of factor abundance in the
literature are weaker in concept than the original although the original cannot
be applied in high dimensional models.
Factor proportions theory has been pronounced dead based on weak
definitions of factor abundance.
This paper presents a simple way to include the trade balance in a general
equilibrium model of production & trade.
The underlying assumption is that there is a free neutral stockpile of
the export on hand to fund a trade deficit or accumulate a trade surplus,
allowing trade imbalance without a parallel international credit market.
This paper presents an alternative simpler model of product differentiation
that can be integrated into competitive trade models. The model develops product differentiation
based on production characteristics rather than the typical demand
specification.
Examples and graphs of numerous production frontiers and relative price
curves from trade theory with Cobb Douglas production coefficients solidify
intuition for neoclassical models of production and trade. Sensible blackboard production frontiers
should be flatter and contract curves more convex than typically drawn. There are other surprises and new theoretical
results revealed with the quantitative approach.
This model with nontraded goods and sector
specific capital allows international capital to become mobile between sectors
in the long run. The full range of
comparative static results is derived. Some properties associated with nontraded goods are due to the capital specificity.
International
differences in production functions and factor price equalization, Keio
Economic Studies, 1997, #1, 43-54
Trade theory assumes identical production functions across countries. In applied production analysis, production
functions do not have identical coefficients.
Most results of trade theory hold if production functions are similar in
a parametric sense. This paper uses a
Euclidean measure of distance to extend models of production and trade to
include different production functions.
The theory and evidence reviewed in this paper point to the usefulness of
factor price equalization, occasionally dismissed in the literature. Factor price convergence is the empirically
relevant concept. With increased trade
countries can be expected to experience factor price convergence, and there is
mounting empirical evidence in favor of factor price convergence. The advice for LDCs is free trade. The
implication for DCs is that free trade will require increased income
redistribution to maintain a middle class based on labor income.
The schism of international economics is relaxed with balance of payments
theory integrated with production theory in a model with international movement
of productive capital. The implications
of balance of payments theory expand with a connection to production.
This paper integrates a model of aggregate unemployment into a general
equilibrium model of production and trade using the empirically robust negative
macroeconomic relationship between the unemployment rate and aggregate income.
Free trade zones avoid protection on imports of intermediate products and
have become fairly common. A healthy
share of manufacturing in the US is located in declared free trade zones. This paper develops basic conditions leading
to free trade zones.
This review extends the 1966-7 Econometrica surveys of John Chipman
to cover the subsequent 20 years of research in the theory of production and
trade. The focus is on theory with
competitive pricing and full employment, models of pure trade theory.
This comment emphasizes the distinction between real income and welfare in
a model of migration and income redistribution.
Migration leads to adjustments in outputs and factor prices. This paper reviews the general theory of
migration and income redistribution in competitive models, presenting new
results for the situation with many factors of production. Factor migration friendship is and
intransitive relationship: if immigration of factor A raises the price of B and
immigration of B raises the price of C, then immigration of A must lower the
price of C. This theoretical result may
contribute to explaining disagreement on immigration policy.
trade theory with three
productive factors
Classical trade theory is based on
production with labor, capital, and land.
These papers with three factors of production expand the general
equilibrium theory of production and trade beyond the factor proportions model
with two factors. With three factors,
there is a range of comparative static adjustments but the role of factor
intensity remains critical.
International trade with three
factors, goods, or countries, Keio
Economic Studies, #2, 2001, 43-52
Akira Takayama once said “Three
is a magic number” for trade theory since trade theorems are based on models
with two factors, goods, and countries.
This paper looks at the range of theoretical possibilities, generalizing
theorems of production and trade.
An oil tariff can lower wages in a model with capital, labor, and energy
inputs. The higher price of oil might
lower general equilibrium demand for labor, and conditions of factor intensity
and substitution are examined.
With sector specific international capital and two domestic factors, there
is a range of possible comparative static adjustments. In the model with only one domestic factor,
a tariff attracts international capital to the import competing industry. This property, however, is not necessary if
there are two domestic factors of production.
Foreign management is the third input in a model with labor and
capital. Foreign managers are supplied
in an international market and move according to international demand. Conditions under which management might
accompany capital are examined.
The magnification effect shows that a tariff raises the real return to at
least one factor and lowers it to at least one other. With 2 factors and 2 goods, there is a single
magnification effect based on factor intensity.
Moving to 3 factors, there are 13 different magnification effects.
Factor intensity reversals can occur with an industrial shutdown when
there are 3 factors of production, contrary to the result with only 2
factors. The industry starts with sector
specific capital then suffers a price decline.
As it shuts down, it may reverse factor intensity even under the
assumption of homothetic production functions.
With CES production, however, factor intensity reversals are impossible.
The answer is not necessarily when there are three factors. The intuition that tariffs protect specific
factors is based on the two factor model.
The expanding import competing industry can hire shared inputs but with
two inputs the expanding industry must increase demand for its specific factor.
Free trade is expected to lead to convergence of similar factors across
countries, the basic intuition of the Stolper-Samuelson
and factor price equalization theorems.
Workers in labor abundant countries should enjoy higher wages with free
trade. When there are three factors,
however, there might be factor price polarization. Wages in labor cheap countries could fall
with a move to free trade. Although such
a country would increase its production and export of the "labor
intensive" product, it can expand production by substituting the other two
factors and demand for labor in the economy falls. Intuition about factor price equalization and
convergence depends on the assumption of two factors.
The theoretical impacts of technical complements are developed for models
with three factors. Factor intensity and
the comparative static effects in the 3x2 model are explored. The paper examines the potential of technical
complements and conditions that result in tariffs not protecting the “most
intensive” factor of production.
This paper develops the intuitive economics of a model with sector
specific capital and perfectly elastic international capital supply.
A long run model of international factor movements and free trade is
examined with internationally mobile capital and two domestic factors of
production. The model lays the
foundation for international factor mobility to equalize factor prices.
A specific factor model of FTAA and
North Carolina textile and apparel industry, with Mostafa Malki and Osei Yeboah, International Economic Journal, 2008
Textile and apparel
industries in the US face increasing import competition under the Free Trade
Area of the Americas. A specific factors
model of production and trade predicts the potential impact in North
Carolina. Returns to specific capital
and output fall considerably but wages generally rise based on higher prices of
other products. Across six labor skill
groups, wages of agriculture and production workers diminish.
Tariff
elimination and the wage gap in an industrial specific factors model,
with John Francis, Review of
International Economics, 2008
A specific
factors model of 458 US manufacturing industries simulates the effects of
eliminating manufacturing tariffs on unskilled and skilled wages. Tariff
elimination slightly lowers both unskilled and skilled wages, and increases the
skilled wage gap.
Free Trade with Cuba: The Effects of a Lifted Embargo in
Alabama, with Curtis Jolly, Southern
Economics and Business Journal, 2008
Factor abundance is a
bilateral concept undefined with many countries and various factors of
production. The present paper proposes a
general definition, the Euclidean distance to the intersection of abundance
rays with unit hyperplanes. This distance measure of factor abundance is
compared with other measures using a well known data set from the literature.
An empirical
measure of factor intensity when there are many factors and many products,
The International Trade Journal, June
2007
Viability
of the mean weighted measure of factor intensity is examined for high
dimensional models of production and trade.
Lost Protection
and Wages: Some Time Series Evidence for the US, with Cassandra
Copeland, International Review of
Economics and Finance, 2007
Time
series analysis shows that the falling US tariffs starting in the mid 1960s had
only a very minor effect on US manufacturing wage. Using parameter estimates, an average tariff
of 18% would be required to raise the wage 1%, certainly lowering the real wage.
Exchange rates and commodity markets:
Global trade in corn, cotton, poultry, and soybeans, with Abdul Almarwani and Curtis Jolly, Agricultural Economics Review, 2007
This
paper analyzes an integrated model of global trade in basic commodities finding
inconsistent effects of bilateral exchange rates and no effects of exchange
risk.
Free trade and a case of local tomato
production, with Abdul Almarwani and Curtis Jolly, Agricultural Economics Review, 2007
Time
series projections indicate that Alabama lost $17 million in tomato production
over the first eight years of NAFTA due to import competition from Mexico.
The industrial wage effects of
Croatia’s accession to the EU in an applied specific factors model of
production, with Josip Funda
and Mia Mikic, International
Economics and Finance Journal, 2006, 157-69
The
specific factors model provides a gauge of the pending adjustments in Croatia
as it enters the EU. The applied production
model has labor specific to each of 23 industries in agriculture,
manufacturing, and services. For a range
of reasonable industrial price changes, the effects on industry wages and
outputs are large.
Aggregation and applied trade theory,
Journal of Economic Integration, 2005
The
level of aggregation of products and factors alters results in tests of the
theory of production and trade.
Aggregation alters the level of intraindustry
trade, estimates of factor substitution, factor intensity rankings, factor
abundance, price responsiveness, and more.
This paper develops a series of propositions for applied trade theory.
The
quantitative impacts of changing prices and capital endowments on income
distribution are compared in simulated factor proportions and specific factors
models. The models include various
production functions, skilled labor aggregates, and
countries. When prices change due to trade, factor intensity has a much
stronger influence on income redistribution than factor substitution. Foreign
capital has a much weaker influence on income redistribution.
FTAA and Colombia: Income distribution
across labor groups, with Hugo Toledo, International Review of
Economics & Finance, 2005,
203-12
The
impact of free trade in the Americas on income distribution in Colombia is
examined in a small scale simulated model of production and trade. The projected income redistribution is large,
helping unskilled labor.
Measuring factor abundance with many
factors and many goods, with Farhad Rassekh, Open
Economies Review, July 2002, 237-49
Tests of the factor content theory of trade depend
critically on the measure of factor abundance when there is data with many
factors of production and many products.
This paper evaluates measures of factor abundance in the literature and
introduces a mean weighted abundance measure that performs better empirically
in predicting the factor content of trade in a well known data set.
The effects in Bolivia on industrial production and income distribution due
to South American free trade are examined in a competitive model of production
and trade. Outputs of manufacturing, gas, agriculture, services, and mining
adjust with the entry of Bolivia into Mercosur.
Redistribution of income between labor and capital is projected, and the
adjustments to output and income distribution are large.
Exports have had only a weak influence on income in Taiwan, weakening the
case for export subsidies.
This application of the Stolper-Samuelson
theorem uncovers results consistent with factor proportions theory. The
empirical model and estimation technique control for the assumptions of full
employment, labor mobility across sectors, and balanced trade. The data covers OECD countries during
1970-85. Results are more favorable for the specific factors model.
This simulation of the general equilibrium competitive model of production
and trade has eight skill types of labor and capital input. Effects of tariffs
on factor prices follow "factor intensity" loosely interpreted.
In this simulated competitive model of production with three factors, free
trade is projected to lower the unskilled wage but raise the skilled wage and
the return to capital in the US. The
implication is that increased income redistribution will be required to
maintain the prior personal income distribution.
A simulation of the specific factors model predicts how much various
industries and labor groups in Alabama will be affected by NAFTA. Imports of labor intensive products will rise
under NAFTA. Projected industrial losers
are apparel, textiles, and other labor intensive manufacturing and the
projected adjustments are large. Unskilled
labor lose relative to skilled labor.
This is a comparison of the strengths of the two most important concepts
in the theory of production and trade, factor intensity and factor
substitution. Simulations show factor intensity has more impact than factor
substitution in comparative static analysis. The implication is that a simple
examination of factor intensity anticipates the effects of prices changes.
This paper uses the general equilibrium competitive model and finds that
labor, opposed to skilled labor and capital, gain with free trade in a number
of LDCs. This presents reason for LDCs
to move to free trade, even unilaterally.
Capital owners, however, can will lobby for
protection along with skilled labor.
A detailed data set is used in an application of the specific factors
model to examine the Japanese economy.
The comparative static model is based on production data for industries
at the two digit level with separate skilled and unskilled labor.
This is a direct application of the competitive model of production and
trade with three inputs to the issue of migration and the resulting income
distribution. Foreign investment and
emigration help unskilled labor. The
redistribution of income between capital, labor, and unskilled labor is examined
across a group of LDCs. There are
different adjustments across the LDCs.
This is a detailed examination of the comparative static properties of the
competitive model of production and trade including capital and eight types of
labor in the manufacturing, agriculture, and service sectors.
This paper applies the competitive model of production and trade to
examine the effects of factor movements on factor prices in Canada. Two factors are friends if an increase in the
supply of one raises the price of the other, and immigration friends and enemies
are discussed.
Immigration of unskilled labor raises both skilled wages and the return to
capital in this application of the competitive model of production and trade. The
various sign patterns of changes in factor prices are completely derived in the
paper. The strengths of factor intensity and factor substitution are compared
in the simulations.
Third country news in the monetary
model of the exchange rate, with John Jackson and Juliet Zheng, Applied
Financial Economics, 2005, 757-64
US news affects other exchange rates in the monetary
model of the exchange rate. Exchange
rate models disregarding third country effects are mis-specified,
suggesting unexplained exchange rate variance may not be a speculative bubble.
Exchange
rates, exchange risk, and Asian export revenue, with WenShwo
Fang and YiHao Lai, International Review of Economics and Finance, 2005
Depreciation may raise export revenue but associated
exchange risk could offset any positive effect.
Asian export markets react differently to exchange rates and associated
risk. High stimulates an effort to avoid
its impact. Exchange risk has a
dominating negative impact for the appreciating Japanese yen. Depreciation has no impact in Malaysia and
Singapore, and exchange risk has a negative effect in Singapore. For another five countries, depreciation
stimulates export revenue but risk leads to a negative net effect in
Taiwan.
Exchange rate effects are difficult to isolate in aggregate industrial
data but this paper uncovers strong local effects in Alabama's main export
industries since the 1970s. Depreciation (appreciation) raises (lowers)
production of exported products, and the effects are large.
Devaluations have had little impact on the trade balance in India.