Welcome

Welcome to my presentation

A presentation on

Technological Innovation, Capital

Mobility, and the Product Cycle in
North-South Trade
-David

Presented byNargis Aktar

09101314501
MSS (Economics)
JKKNIU

Dollar

Introduction
Technological Innovation:
As a form of Technological Innovation, new products plays a vital role in determining the
pattern of international trade.
Trade between developed and Less developed countries
Argument of Raymond Vernon on new product (1966)
new product introduced in developed countries, when standardized it can produce far from
the market.
A model of Product cycle by Paul Robin Krugman
New products introduced in the North when at the same time South produced old products
of North
Increase in the range of production improvers the terms of trade

 Classical Vs Neo classical trade model

North produce only new goods while south only produce old goods.
Increase in the labor force in one nation lead to an increase of wage in
other nation

The model illustrates that the wage gap between North and South is
stable.

Short-run Effect

Increase in labor force in South

Increase of Wage in North

Increase of product demand in North

Increase the Terms of Trade of North

Increase of rate of Diffusion of Technology to South

Flow of capital to South

Reduction of capital-labor ratio in North

Effects are predictable

1. Static Model

Assumptions:

Two region, North and South

Large number of goods

Three factors of production-capital, labor, and know-how

Homogenous capital and labor

The know-how to produce each good originates in North

Continued

Capital and labor input into the production

Each goods same in neoclassical
Production with constant return to scale
P

Despite the neoclassical production

Function in the classical model the rate of

Transformation between two types of goods

1
s
Opportunity cost of new good is 1 in North
And infinite in the South in terms of trade

Aggregate quantity of new goods

Figure- 1

Continued.

Number of new and old goods are fixed at a time

In this position we specify formally the static equilibrium

2. Comparative Statics

Effects by changing the parameters

Functions can be written as-

(r , K , LS )

p p (r , k , LS , LN , K , ),
q q ( r , k , LS , LN K , )
are constant

LN , r ,

r , k , LS

Increase of r ceteris paribus, rise the p and q both.

can determine by analyzing the comparative statics around static

equilibrium.

p / p q1 / q 0

1
Partial derivatives of p and q with respect to r satisfy

Increase of k ceteris paribus, rises the aggregate demand of North.

q2 / q
Partial derivatives of p and q with respect to k satisfy

p2 / p 0

Continued

Increase of LS , ceteris paribus, aggregate output of South increase with

a rise in p.
Proportional increase of q N , q S
rises as well because capital is now
relatively more scarce in the South.

p3 / p q3 / q

(change in q is relatively smaller than the increase in P)

3. Innovation, Technology transfer

and Flow of Capital.

Technological Innovation and Technology Transfer-

Technological innovation is the introduction of new goods

Transfer of technology enables the south to produce goods that had
previously been the monopoly of the North
Product produced in South is relatively cheap
Movement of production
the difference in the cost of production in North and South is summed up
the terms of trade, p
As p increase, the transfer of technology should increase

The movement of capital

The total stock of capital is fixed and indestructible, but over time
capital can be moved

The movement will take place in response to differences in the return to

capital

Ratio of capital stock between North and South isk g (q (r , k , LS )), g 0, g (1) 0

The share of the worlds capital stock employed in the North increases
when q is greater than 1.

The flow of capital stops when the return to capital is equal in two
region.

4. Dynamic Adjustment to Long-Run

Equilibrium

Factor price and terms of trade are stable

Long-run equilibrium occurs when r and k attain stable values

Long-run equilibrium occurs when r and k attain stable values

Continued

In figure 2, KK schedule,k 0

Slope of this schedule obtained by

differentiating k 0

(d r / d k ) / KK q2 / q1 0

In RR schedule , r 0
The slope of this schedule is

(d r / d k ) / RR (1 r ) f p2 (i f ) (1 r ) f p1

An increase in K is required to reduce P

slowing down the diffusion of technology
r 0
and restoring the
The necessary and sufficient condition for
equilibrium is the RR be upward sloping but
flatter than KK

R
K
k

Figure 2

5. Characteristics of Long-run
equilibrium

Both r and k equals to zero and r and k have stable values

With r and k constant, factor prices and the terms of trade are stabilized

Long run equilibrium terms of trade must be greater than 1

Goods produced in the North is more capital intensive than South

Overall ratio of capital to labor will have to be higher in the North than
South

Thus the model leads to an equilibrium at which the overall labor-capital

ratio is higher in the North than in the South, and at which the North
exports capital intensive and import labor intensive goods

6. Shocks to Long-Run Equilibrium

Values of all of the variables change two effect on Long run equilibrium

Labor force growth in The South

Increase in Southern Labor force leads in the long run to a decrease in r

Increase in the labor force also leads in the long run to a decrease in k
K K
Increase in the LS shifts the RR schedule r
R
down to RR
R
The KK schedule will shift left or right which
Depends on whether q3 is positive or
negative
KK shifts to the left to KK

R
K

K
Figure-3

Continued
Both
r and k have smaller values whereK K andRR intersects

In long run wage rate declines in the North which is the result of two
change- a reduction of Northern labors marginal productivity and decline
Norths Term of trade

Exogenous increase in the rate of diffusion

Increase the for any value of p. This will shifts the RR schedule down so
that both r and k decline in moving to the new equilibrium
Terms of trade of North decrease
Capital-labor ratio falls
Rapid diffusion of technology raises real wage in the South for two reasonit leads to improvement in terms of trade of Southern region and the
marginal physical productivity of southern workers

Conclusion

In short run the effects of trade is predictable

By tying the pace of innovation, diffusion and capital movement to the

price determined through trade, the model implies, over time the
technology and capital that nations have available will be as much the
result as the cause of trade

The key result of the model is that labor force growth in the South
initially increases real wage in the North

But in the long run Northern wage reduces by transfer pf technology and
drawing capital of the North as well.

Thank you.