Page 68 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Example 1 : If only the supply of labor increases in the U.K. or if the supply of labor increases
proportionately more man the supply of capital and its technology remains the same, then the U.K.’s
production possibilities curve or transformation curve might shift outward from TT to T’T’ as shown
in Figure 5.1. Note that the shift is greater along the horizontal axis, which measures cloth (the
L-intensive commodity), than along the vertical axis, which measures wheat (the K-intensive
commodity). The shift along the cloth axis in Figure 5.1 is exaggerated for pedagogical reasons. Even
if the supply of labor alone increases in the U.K., the U.K. production possibilities curves will
nevertheless shift slightly upward since tabor is also used in the production of wheat (the K-intensive
commodity). However, according to the Rybezynski theorem, the output of cloth would rise while
the output of wheat would fall in the U.K. at constant PP . For the effect of other types of factor
C
w
changes on the production possibilities curve of the U.K. and the U.S. and for graphical illustrations
and an intuitive proof of the Rybezynski theorem.
5.2 Technical Progress

Technical progress increases the productivity of a nation’s factors of production and has the same
general effect on the nation’s productions possibilities curve as an increase in the supply of its factors.
There are at least three types of technical progress :

W
U.K.
80
T

60 T
A
40

20
B
T T

0 20 40 60 80 100 120 140 160 180 200 220 240 260 C
Figure 5.1

(1) K-Saving technical progress throughout the economy increases the productivity of labor
proportionately more than that of capital. As a result, L is substituted for K in production at
constant w/r, and K/L falls in the production of both commodities. This means that a given
output can now be produced with fewer units of L and K but also with lower K/L (higher L/K).
K-saving technical progress is equivalent to a proportionately greater increase in the supply of
labor than of capital (with unchanged technology). For example, K-saving technical progress in
the U.K. equally applicable to cloth and wheat production might cause an outward shift in the
U.K. production possibilities curve torn TT to T’T’ in Figure 5.1. Note that technical progress is
defined at constant w/r, and constant returns to scale are assumed in production.
(2) L-saving technical progress is exactly the opposite of K-saving technical progress.
(3) Neutral technical progress increases the productivity of L and K by the same proportion and
results in a uniform or symmetrical outward shift in the nation’s production possibilities curve.
5.3 Change in Factor Supplies, Technology and Trade

When there is an increase in a nation’s supply of factors of production and/or technical progress, the
nation’s production possibilities curve shifts outward. With unchanged tastes, this causes a change

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