Trade with Factor Mobility

As mentioned before, some important conclusions in international trade theory are held when only goods are allowed to move between countries. It is necessary to check whether these conclusions are still held when factors move between countries as well. In his pioneering analysis on international mobility of factors, Mundell (1957) emphasizes.

Chapters 2 and 3 examined traditional trade theories with factor mobility between sectors with each country but factor immobility between countries. Commodity movements are at least to some extent a substitute for factor movements. The absence of trade impediments implies commodity price equalization and, even when factors are immobile, it is argued that there is a tendency toward factor-price equalization. This chapter is concerned with trade with factor mobility. We are concerned with trade patterns with internationally mobile factor endowments. We are concerned with capital and labor mobility. We will show that international capital or/and labor movement may invalidate some of the four core theorems developed in Chap. 2. Section 4.1 studies the validity of the four fundamental trade theorems, the factor equalization theorem, the Rybczynski theorem, the Stolper-Samuelson theorem, and the Heckscher-Ohlin theorem, in the presence of international capital movement.1 We are still concerned with a model similar to the 2×2 model analyzed in Sect. 2.3. The 2×2 model is extended in two ways. Capital moves freely between countries. Moreover, land is considered as a production factor. The three-factor model still has two immobile factor endowments, labor and land. Section 4.2 is concerned with immiserizing growth. We are concerned with a trade model with international factor mobility and variable returns to scale. The model of this section is a synthesis of the trade model with variable returns to scale in Sect. 3.4 and the model with international capital mobility in Sect. 4.1. Section 4.3 is concerned with a model of emigration and wage inequality proposed by Marjit and Kar. Rather than following the dual approach accepted by Marjit and Kar, we will use the approach as in the previous sections. The model deals with issues related to trade and wage inequality for developing economies. Section 4.4 introduces a model with Chamberlinian agglomeration, basing on the coreperiphery model proposed by Krugman. The model studies interactions among transport costs, increasing returns at the firm level, and supply and demand linkages.