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					  Differences in factor
      proportions

The Heckscher-Ohlin model
       (chapter 8)
    Assumptions of the Heckscher-Ohlin
                  model

•   Identical technologies
•   Constant returns to scale
•   Preferences identical and homothetic
•   No market distortions
      Differences in factor proportions
Classical (Ricardian) theory             Heckscher-Ohlin theory

Different technologies                   Identical technologies

One factor of production, L              Two factors of production, K
                                         and L

Trade leads to complete specialisation   Trade does not leads to complete
(in most cases)                          specialisation (in most cases)

Everybody gains from trade               There are winners and loosers from
                                         international trade
Main insights:

  Countries will export products that utilise
  their abundant factor of production and
  import products that utilise the countries'
  scarce factor

 Factor price equalisation (FPE)
             Factor endowments

Physical definition:
       K        K
                  
        L  Home  L  Foreign
Factor price definition:
            Autarky          Autarky
        w             w
                     
        r  Home       r  Foreign

Home relatively capital-abundant
Foreign relatively labor-abundant
            Factor intensities

     K    K
        
      L Y  L  X
Hence,
Y relatively capital-intensive
X relatively labor-intensive
         Constant returns to scale
     K
                k
2K
                                  K
                             k
                                  L




 K

                              X=100



                      X=50
                                      L
                L             2L
    Factor intensities with 2 goods
K
     kY’
                kY


                     kX’



                Y

                               kX

           w              X
           r                    w
                                r
                                    L
        Factor intensity reversals
K
    w     kY
    r          kX

                        kX’


                                   kY’
                    X

                              Y
                              w
                              r

                                         L
Factor endowments, production and
      the trading equilibrium
    Factor endowments, 2 countries
K


            kH

                            kF


                  YH
                 YF

                            XF
                       XH


                                 L
     Endowments and production possibilities
 Y          A
           PH

YH


YF




                                A
                              PF




                                 X
                  XH        XF
The trading equilibrium
                    P*




                     A
                    PH

               P*
                                           ExH
                    PA
                     F


                                     ExF
           A             B

   F’s exports of   H’s imports of               XC-XP
         X                X
Heckscher-Ohlin theorem:

  A country will export the commodity that intensively
  uses its relatively abundant factor
  A country will export the services of its relatively
  abundant factor and import services of its relatively
  scarce factor
     Trade in the Heckscher-Ohlin model
 Y

YH     QH,                     A=B


YF               CH, CF
             A

                          QF
                     B

                                     P*




                                          X
                   XH           XF
    Product prices, factor prices and production

Y
                                                                OY
                     K

                                               ω2
    A
                P1                                        B
                                                              kX2
                                 ω1=w/r1
            B
                                           A
                     P2                             kX1


                     X
                          OX                                   L
  Unit value isoquants and isocosts in the
          Heckscher-Ohlin model
• Unit value isoquants:
    Combinations of K and L that results in a value of
    output that equals $1 for each industry
• Unit value isocost:
    Combinations of K and L that costs $1
  Factor-price-equalisation (FPE)
             theorem:
Free and competitive trade will make factor
prices converge along with traded goods prices
as long as production technologies are
identical and characterized by constant returns
to scale and countries are not fully specialised.
            Unit value isoquants and isocosts
        K


             kY              kH
1
    r


                  Y(1$)



                                          kX


                          ω=w/r           X(1$)
                                                  L
                                  1
                                      w
               Factor price equalization
K


                kY



                         Y(1$) Ha


                                    X
    Y(1$) Fa
                                        kX
                     X(1$) Ha
                                             X(1$) Fa
                                ω*              ωFa
                 ωHa
                                                        L
           Cone of diversification − limits
K           kY
                      to FPE
                         kH


    Y($)




                                          kX

                                               k’F

                              X($)
                    ωH               ωF
                                               L
        What about real wages?
           Assume increase in the
Y                                     w  p  MPL
              production of Y
                                             w
                                                MPLX
                                             Px
                                             w
               2                                 MPLY
                         f ( K , L)          PY

    1                                 r  p  MPK
                                             r
                                                MPKX
                                             Px
                                             R
         Slope = MPL                             MPKY
                                             PY




                               L
  The Stolper-Samuelson theorem
If there are constant returns to scale and both
goods continue to be produced, a relative
increase in the price of a good will increase the
real return to the factor used intensively in that
industry and reduce the real return to the other
factor.
If a relative increase in the price of K-
intensive good Y  both industries
become more labor intensive


   w                      r
      MPLX                  MPKX
  PX                     pX


   w                       r
       MPLY                  MPKY
   pY                     pY
     The effect of a change in factor
         endowments on output
                                OY        O’Y
K




                                    Q2


                Q1




OX                              L        L’
          The Rybczynski theorem
If relative commodity prices are constant and if both
commodities continue to be produced,
an increase in the supply of a factor will lead to an
increase in the output of the commodity using that
factor intensively and a decrease in the output of the
other commodity
     The limits to factor price equalisation again
                          OYH




                                      OYF      O’YF


                                 E′




               E




OX

				
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posted:2/27/2010
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