Economics Dictionary of ArgumentsHome
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| Factor Intensity Reversal: Factor Intensity Reversal occurs when a good that is, for example, labor-intensive in one country, becomes capital-intensive in another country. This happens if the relative factor prices (like wages vs. rental rates of capital) differ significantly between countries, leading firms to choose different production techniques for the same good. It challenges some predictions of the Heckscher-Ohlin model. See also Factors of production, Factor price, Heckscher-Ohlin model._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Robert C. Feenstra on Factor Intensity Reversal (FIR) - Dictionary of Arguments
Feenstra I 1- 15 Factor Intensity Reversal (FIR)/Feenstra: While FIR might seem like a theoretical curiosum, they are actually quite realistic. Consider the footwear industry, for example. Feenstra I 1- 16 While much of the footwear in the world is produced in developing nations, the United States retains a small number of plants. In sneakers, New Balance has a plant in Norridgewock, Maine, where employers earn some $14 per hour.* Some operate computerized equipment with up to 20 sewing machine heads running at once, while others operate automated stitchers guided by cameras, that allow one person to do the work of six. This is a far cry from the plants in Asia that produce shoes for Nike, Reebock and other U.S. producers, using century-old technology and paying less than $1 per hour. (…) when there are two possible solutions for the factor (…) then some countries can be at one equilibrium and others countries at the other. >Equilibrium. Equilibrium: How do we know which country is where? To answer this, it is necessary to consider the full-employment conditions: these will allow us to determine the factor prices prevailing in each country. Notice that we have now re-introduced a link between factor endowments (from the full-employment conditions) and factor prices, as we argued earlier in the one-sector model: when there are FIR in the two-by-two model, it will turn out that a laborabundant country will be at an equilibrium like point A, paying low wages, while a capitalabundant country will be at an equilibrium like point B, paying high wages. >Factor price, >Wages, >Production. Feenstra I 1-19 (…) when only one good is produced, then factor prices are determined by the marginal products of labor and capital as in the one-sector model, and will certainly depend on the factor endowments. This is why the Lemma stated above requires that both goods are produced, or equivalently, that the endowments are inside the “cone of diversification.” Now consider the more complex case (...) where we have re-drawn the two sets of gradient vectors (…) after multiplying each of them by the outputs of their respective industries. These vectors create two cones of diversification, labeled as cone A and cone B. Now we can answer the question of which factor prices will apply in any given country: a labor abundant economy, with a high ratio of labor/capital endowments (…) with low wages; whereas a capital abundant economy with a high ratio of capital/labor endowments (…) will have factor prices (…) with high wages. Thus, factor prices will depend on the endowments of the economy. A labor-abundant country such as China will pay low wages and a high rental (…). In contrast, a capital-abundant country such as the United States will have high wages and a low rental (…).** * The material that follows is drawn from Aaron Bernstein, “Low-Skilled Jobs: Do They Have to Move?”, Business Week, February 26, 2001, pp. 94-95. ** Empirical evidence on whether developed countries fit into the same cone is presented by deBaere and Demiroglu (2000)(1), and the presence of multiple cones is explored by Leamer (1987)(2), Harrigan and Zakrajšek (2000)(3), Schott (2000)(4) and Xu (2002)(5). 1. Debaere, Peter and Ufuk Demiroglu, 2000, “On the Similarity of Country Endowments and Factor Price Equalization for Developed Countries,” University of Texas, Austin, manuscript. 2. Leamer, Edward E., 1987, “Paths of Development in the 3-Factor, N-Good General Equilibrium Model,” Journal of Political Economy, 95, 961-999. 3. Harrigan, James and Egon Zakrajšek, 2000, “Factor Supplies and specialization in the World Economy,” NBER Working Paper no. 7848, August, and Federal Reserve Bank of New York Staff Report, no. 107, August. 4. Schott, Peter, 2000, “One Size Fits All? Heckscher-Ohlin Specialization in Global Production,” Yale University, manuscript. 5. Xu, Bin, 2002, “Capital Abundance and Developing Country Production Patterns,” University of Florida, manuscript._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Feenstra I Robert C. Feenstra Advanced International Trade University of California, Davis and National Bureau of Economic Research 2002 |
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> Counter arguments against Feenstra
> Counter arguments in relation to Factor Intensity Reversal (FIR)
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