THE RELATIONSHIP OF TRADE AND FACTOR MOBILITY
THE RELATIONSHIP
OF TRADE AND FACTOR MOBILITY
Whether capital or some other asset is transferred abroad initially to acquire a direct investment, the asset is a type of production factor. Eventually, the direct investment usually involves the movement of various types of production factors as investors infuse capital, technology, personnel, raw materials, or components into their operating facilities abroad. Therefore, it is useful to examine the relationship of trade theory to the movement of production factors.
The Trade and Factor Mobility Theory
Chapter 4 explained that trade often occurs because of differences in factor endowments among countries. A country such as Canada, with abundant arable land relative to its small but educated labor force, may cultivate wheat in a highly mechanized manner. This wheat may be exchanged for handmade sweaters from Hong Kong, which require abundant semiskilled labor and little land.
Historical treatises on trade assumed that the factors of production were nearly immobile internationally and that trade could move freely. In actuality, there are many natural and imposed barriers that make both finished goods and production factors partially mobile internationally. Factor movement is an alternative to trade that may or may not be a more efficient allocation of resources. If the factors of production were not free to move internationally as assumed by early economic theorists, then trade would ordinarily be the most efficient way of compensating for differences in factor endowments. If neither trade nor the production factors could move internationally, a country would often have to forgo consuming certain goods. Alternatively, countries could produce them differently, which would usually result in decreased worldwide output and higher prices. We can only speculate on the astronomical cost of coffee if it were produced, say, in hothouses in Arctic regions. In some cases, however, the inability to utilize foreign production factors may stimulate efficient methods of substitution, such as the development of new materials as alternatives for traditional ones or of machines to do hand work. The development of synthetic rubber and rayon was undoubtedly accelerated because wartime conditions made it impractical to move silk and natural rubber, not to mention silkworms and rubber plants.
OF TRADE AND FACTOR MOBILITY
Whether capital or some other asset is transferred abroad initially to acquire a direct investment, the asset is a type of production factor. Eventually, the direct investment usually involves the movement of various types of production factors as investors infuse capital, technology, personnel, raw materials, or components into their operating facilities abroad. Therefore, it is useful to examine the relationship of trade theory to the movement of production factors.
The Trade and Factor Mobility Theory
Chapter 4 explained that trade often occurs because of differences in factor endowments among countries. A country such as Canada, with abundant arable land relative to its small but educated labor force, may cultivate wheat in a highly mechanized manner. This wheat may be exchanged for handmade sweaters from Hong Kong, which require abundant semiskilled labor and little land.
Historical treatises on trade assumed that the factors of production were nearly immobile internationally and that trade could move freely. In actuality, there are many natural and imposed barriers that make both finished goods and production factors partially mobile internationally. Factor movement is an alternative to trade that may or may not be a more efficient allocation of resources. If the factors of production were not free to move internationally as assumed by early economic theorists, then trade would ordinarily be the most efficient way of compensating for differences in factor endowments. If neither trade nor the production factors could move internationally, a country would often have to forgo consuming certain goods. Alternatively, countries could produce them differently, which would usually result in decreased worldwide output and higher prices. We can only speculate on the astronomical cost of coffee if it were produced, say, in hothouses in Arctic regions. In some cases, however, the inability to utilize foreign production factors may stimulate efficient methods of substitution, such as the development of new materials as alternatives for traditional ones or of machines to do hand work. The development of synthetic rubber and rayon was undoubtedly accelerated because wartime conditions made it impractical to move silk and natural rubber, not to mention silkworms and rubber plants.
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