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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

(in most cases)                          specialisation (in most cases)

Everybody gains from trade               There are winners and loosers from
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
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
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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