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Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model)

Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model). The Explanation of International Trade: Differences across countries in relative abundance of factors of production. Assumptions: Identical Technologies Identical Demand Patterns. Factor Intensity.

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Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model)

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  1. Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model) The Explanation of International Trade: Differences across countries in relative abundance of factors of production. Assumptions: Identical Technologies Identical Demand Patterns

  2. Factor Intensity : Full employment Y K constant A B B’ L constant C D X Structural Bias: The Transformation Curve( = ABC) shifts asymmetrically with unbalanced changes in K and L. A Rise in K, with no change in L, leads to an increase(fall) in X (Y)).

  3. AT POINT C 1) Labor is unemployed: W=0. (2) X-industry is active Y-industry is inactive. Therefore: AT POINT A 1) Capital is unemployed: R=0. (2) Y-industry is active X-industry is inactive. Therefore:

  4. AT Point A(continue):

  5. At Point B Relative Supply

  6. The Bias in Relative SupplyTwo Countries: H and F (H is more capital abundant)

  7. Free Trade and Autarkic Equilibria 3 2 1 2=Free trade 1=autarky in H 3=autarky in F

  8. Full Employment Supply of X and Y:

  9. Heckscher-Ohlin Proposition #1: The country exports the good which is intensive in the use of the factor with relative abundance.

  10. Full Employment Factor Prices:

  11. Income Distribution and International Trade W A Industry X-Line B B’ Industry Y-Line C D R ABC=factor price frontier A rise in (X is capital intensive) will raise R and decrease W.

  12. Heckscher-Ohlin Proposition #2(dual to Proposition #1): Free trade causes an increase in the factor price of the factor of production which is used intensively in the export industry and a fall in the factor price used intensively in the import competing industry.

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