The Heckscher-Ohlin-Samuelson Theorem by yurtgc548

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									The Heckscher-Ohlin-Samuelson
          Theorem
               • ECN 3860
               • International
                 Economics
               • Dr. Ali Moshtagh
    The Classical and Neo-Classical
     Models of International Trade
•   The Classical model of international trade is based on the “Labor
    Theory of Value”; it assumes only one factor of production, identical
    technology between the two countries, identical tastes, etc.. The
    model promotes specialization and requires complete specialization for
    at least one country, due to constant opportunity costs.

•   Given a concave production possibilities frontier, international trade
    should lead to incomplete specialization, due to increasing costs.

•   The Neo-Classical models of international trade assume more than one
    factor of production. The Heckscher-Ohlin-Samuelson model (also
    known as the Factor Endowment or the Variable Proportion Model)
    not only describes the pattern of trade, but it also predicts the impact of
    trade on the national income and returns to the factors of production.
                 Other Assumptions:
•   two countries, two factors, two products;
•   perfect competition in all markets;
•   Free trade;
•   Factors of production are available in fixed amounts in each country;
•   Full mobility of factors of production between industries within each
    country;
•   Immobility of factors of production between countries;
•   The two countries are alike with respect to tastes;
•   Technology is available to both countries; and
•   Linear homogeneous production functions of degree one (constant
    returns to scale).
   The Heckscher-Ohlin Theorem
Critical Assumptions:
• Countries are characterized by different factor
  endowments--a country is capital abundant if it
  has a higher ratio of capital to other factors
  than does its trading partner;
• There are different factor intensities between
  products--a product is capital-intensive if, at
  identical wages and rents, its production
  requires more capital per worker than does the
  other product.
              The H-O Theorem
• Given identical production functions but different
  factor endowments between countries, a country will
  tend to export the commodity which is relatively
  intensive in her relatively abundant factor
• In general, countries tend to have comparative
  advantage in the products that are relatively intensive
  in their relatively abundant factors
The Stolper-Samuelson Theorem:
Assumptions:
• One country produces two goods (wheat and cloth) with two factors of
   production (capital and labor);
• neither good is an input into the production of the other;
• competition prevails;
• factor supplies are given;
• both factors are fully employed;
• both factors are mobile between sectors (but not between countries);
• one good (wheat) is capital-intensive and the other (cloth) is labor-
   intensive);
• opening trade raises the relative price of the export good.
The Stolper-Samuelson Theorem
• moving from no trade to free trade raises the
  returns to the factor used intensively in the
  rising-price industry, and lowers the returns
  to the factor used intensively in the falling-
  price industry, regardless of which goods
  the sellers of the two factors prefer to
  consume
    The Factor Price Equalization
             Theorem
Assumptions:
• there are two countries using two factors of production producing two
   products;
• competition prevails in all markets;
• each factor supply is fixed, and there is no migration between countries;
• each factor is fully employed in each country with or without trade;
• there are no transportation or information costs;
• free trade;
• production functions exhibit constant returns to scale, and are the same
   between countries for any industry;
• production functions are not subject to factor intensity reversals; and
• both countries produce both products with or without trade.
  The Factor Price Equalization
           Theorem
• Free trade will equalize not only
  commodity prices but also factor prices,
  so that all workers earn the same wage
  rate and all units of capital will earn the
  same rental return in both countries
  regardless of the factor supplies or the
  demand patterns in the two countries
Hourly Pay in Manufacturing
               The Leontief Paradox
    In 1953 Wassily Leontief published the results of the most famous empirical
    investigations in economics, an attempt to test the consistency of the H-O Model
    with the U.S. trade patterns.

Leontief’s objectives were:

•   to prove that the H-O Model was correct; and
•   to show that the U.S. exports were capital intensive

    Leontief developed a 1947 input-output table for the U.S. to determine the capital-
    labor ratios used in the production of U.S. exports and imports. Leontief found
    that the U.S. exports used a capital-labor ratio of $13,991 per man year, whereas
    import substitutes used a ratio of $18,184 per man year.
         The Leontief Paradox
The key ratio of [( KX / LX ) / ( KM / LM )]


        (13,991 / 1) / (18,184 / 1) = 0.77

was calculated. Given the presumption that the U.S.
was relatively capital abundant, that ratio was just the
reverse of what the H-O Model predicted. Thus, it is
called the Leontief Paradox.

								
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