Page 67 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Dilfraz Singh, LPU Unit 5 : Role of Dynamic Factors : Tastes, Technology and Factors Endowments in Trade

Unit 5 : Role of Dynamic Factors : Tastes, Technology and Notes
Factors Endowments in Trade

CONTENTS
Objectives
Introduction
5.1 Growth in Factor Supplies Through Time
5.2 Technical Progress
5.3 Change in Factor Supplies, Technology and Trade
5.4 Change in Tastes and Trade
5.5 Dynamic Factors, Trade and Development
5.6 Factors Endowment in Trade
5.7 Summary
5.8 Key-Words
5.9 Review Questions
5.10 Further Readings

Objectives

After reading this Unit students will be able to:
• Understand Dynamic Factors.
• Explain Tastes, Technology and Factors Endowments in Trade.

Introduction

So far, we have assumed that each nation has given and unchanging factor endowments and
technology (hence a given production possibilities curve) and given and unchanging tastes (hence a
given community indifference map). On this premise, we examined the basis and the gains from
trade. However, over time a nation’s factor endowments change, and its technology may improve.
These changes cause its production possibilities curve to shift. Similarly, a nation’s tastes may change
and result in a different indifference map. All of these changes affect the terms of trade and the
volume of trade. How much these are altered depends on the actual type and degree of the changes
occurring.
5.1 Growth in Factor Supplies Through Time

If technology remains the same but the factors of production available to a nation increase, the nation’s
production possibilities curve shifts outward. This shift is uniform or symmetrical (so that the new
production possibilities curve has the same shape as the old one) if labor and capital grow in the
same proportion. This is called balanced growth. If only Ihe nation’s supply of labor increases or if its
supply of labor increases proportionately more than its supply of capital, then the nation’s production
possibilities curve shifts more along the axis measuring the L-intensive commodity than along the
axis measuring the K-intensive commodity. The opposite shift occurs if only the nation’s supply of
capital increases or if its supply of capital increase proportionately more than its supply of labor.
According to the Rybczynski theorem, at constant relative commodity prices, the growth of only one
factor leads to an absolute expansion in the output of the commodity using the growing factor
intensively and to an absolute reduction in the output of the commodity using the nongrowing factor
intensively.

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