1 J. Tybout Topics in International Trade (Econ 507B) Lecture 1 ...

Formally, Helpman and Krugman (1985, chapter 1) describe the set of factorendowments that lead to FPE (with no non-traded goods) as:⎪⎧FPE = ⎨( V 1,V 2,K , V C ) | ∃λic≥ 0, ∑λic= 1 ∀i∈ I ∋ V c = ∑λicV⎪⎩c∈Ci∈IiW⎪⎫∀c∈ C⎬⎪⎭Any factor allocation across C countries that leads to FPE must be consistent with nonnegativeoutputs of each good in each country, when (1) global output levels of eachgood match those of the integrated equilibrium, and (2) each country exhausts itsendowments when using production techniques that reflect the integrated equilibriumfactor intensities. (V iW is the vector of global factor usage for production of good i in theIE, and 8 ic is the share of global i production done in country c.)Sufficient conditions for FPE are:i) all C countries share the same technology (production functions);ii) there are at least as many goods as factors (why?);iii) there are no factor intensity reversals;iv) at equilibrium prices, all goods can be produced in each country at zero profit.Note: with factor intensity reversals, the same set of goods may be produced differentlyin two countries, given the same set of output prices. Thus the mapping from prices tofactor prices cannot be one to one.KAB21L7