1 / 76

International Economics

International Economics. Li Yumei Economics & Management School of Southwest University. International Economics. Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory. Organization. 5.1 Introduction 5.2 Assumptions of the Theory

effie
Télécharger la présentation

International Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International Economics Li Yumei Economics & Management School of Southwest University

  2. International Economics Chapter 5 Factor Endowments and the Heckscher-Ohlin Theory

  3. Organization • 5.1 Introduction • 5.2 Assumptions of the Theory • 5.3 Factor Intensity, Factor Abundance, and the Shape of the Production Frontier • 5.4 Factor Endowments and the Heckscher-Ohlin Theory • 5.5 Factor-Price Equalization and Income Distribution • 5.6 Empirical Tests of the Heckscher-Ohlin Model • Chapter Summary • Exercises

  4. 5.1 Introduction • Hechscher-Ohlin Trade Model • To extend the trade model to identify one of the most important determinants of the difference in the pretrade-relative commodity prices and the comparative advantage among nations; • To examine the effect that the international trade has on the relative price and income of the various factors of production • Other more recent trade models • Leontief Paradox

  5. 5.1 Introduction • Answer Two Questions • The basis of comparative advantage: further explanation of the reason or cause for the difference in relative commodity prices and comparative advantage between the two nations; • The effect of international trade on the earnings of factors of production in the two trading nations: to examine the effect of international trade on the earnings of labor as well as on international differences in earnings

  6. 5.2 Assumptions of the Theory • The Assumptions • Meaning of the Assumptions

  7. The Assumptions • 1. Two nations, two commodities (X and Y) and two factors (labor and capital); • 2. Both nations use the same technology in production; • 3. Commodity X is labor intensive, and commodity Y is capital intensive in both nations; • 4. Both commodities are produced under constant returns to scale in both nations; • 5. There is incomplete specialization in production in both nations; • 6. Tastes are equal in both nations;

  8. The Assumptions • 7. There is perfect competition in both commodities and factor markets in both nations; • 8. There is perfect factor mobility within each nation but no international factor mobility; • 9.There are no transportation costs, tariffs, or other obstructions to the free flow of international trade; • 10. All resources are fully employed in both nations; • 11. International trade between the two nations is balanced;

  9. Meaning of the Assumptions • More realistic case of assumption 1; • Assumption 2 of same technology means that both nations have access to and use the same general production techniques. If factor prices were same, the two nations would use the exactly same amount of labor and capital in the production of each commodity; since factor prices usually differ, producers in each nation will use more of the relatively cheaper factor in the nation to minimize their costs of production.

  10. Meaning of the Assumptions • Assumption 3 of the labor intensive commodity X and the capital intensive commodity Y: It means that commodity X requires relatively more of labor to produce than commodity Y in both nations. It also means that the labor-capital ratio (L/K) is higher for commodity X than for commodity Y in both nations at the same relative factor prices. This is equivalent to saying that the K/L ratio (capital-labor ratio) is lower for X than for Y in both nations, but not mean K/L ratio for X is the same in both nations.

  11. Meaning of the Assumptions • Assumption 4 of constant returns to scale It means that increasing the amount of labor and capital used in Production of any commodity will increase output of that commodity in the same proportion. • Assumption 5 of incomplete specialization It means that even with free trade both nations continue to produce both commodities. This implies that neither of the two nations is “very small”. • Assumption 6 of equal tastes It means that demand preferences, as reflected in the shape and location of indifference curves are identical in both nations.

  12. Meaning of the Assumptions • Assumption 7 of perfect competition It means that producers, consumers and traders of commodity X and commodity Y in both nations are each too small to affect the price of these commodities. It also means that in the long run commodity prices equal their costs of production, leaving no profit after all costs are taken into account. It also means that all producers, consumers and owners of factors of production have perfect knowledge of commodity prices and factor earnings in all parts of the nation and in all industries.

  13. Meaning of the Assumptions • Assumption 8 of perfect internal factor mobility It means that labor and capital are free to move, and indeed do move quickly from areas and industries of lower earnings to areas and industries of higher earnings until earnings for the same type of labor and capital are the same in all areas, uses, and industries of the nation. On the other hand, there is zero international factor mobility. • Assumption 9 of no transportation costs or other trade obstructions It means that specialization in production proceeds until relative commodity prices are the same in both nations with trade.

  14. Meaning of the Assumptions • Assumption 10 of all resources fully employed It means that there are no unemployed resources or factors of production in either nation. • Assumption 11 of the balanced trade It means that the total volume of each nation’s exports equals the total volume of the nation’s imports.

  15. 5.3 Factor Intensity, Factor Abundance, and the Shape of the Production Frontier • Factor Intensity • Factor Abundance • Factor Abundance and the Shape of the Production Frontier

  16. Factor Intensity • Figure 5.1 Factor Intensity FIGURE 5-1 Factor Intensities for Commodities X and Y in Nations 1 and 2

  17. Factor Intensity • Explanation of Figure 5.1 Factor Intensity 1. The horizontal axis refers to the amount of labor while the vertical axis refers to the amount of capital, and the slope of the ray measures the capital-labor ratio (K/L) in the production of the commodity; 2. Nation 1’s slope of the rays (K/L) in the production of Commodity X and Commodity Y; 1) K/L in Y=1 ( 2 K and 2 L for 1 Y, 4K and 4L for 2Y with constant returns to scale); 2) K/L in X=1/4 (1K and 4L for 1X, 2K and 8L for 2X with constant returns to scale; 3. Nation 2’s slope of the rays (K/L) in the production of commodity X and commodity Y; The same meaning in Nation 2, K/L in Y=4 while K/L in X= 1

  18. Factor Intensity • Conclusion 1. Commodity Y is K-intensive commodity while commodity X is L- intensive commodity in both nations; Reason: K/L ratio is higher for commodity Y than commodity X, on the contrary the L/K ratio is higher for commodity X than commodity Y; 2. K/L ratio in Nation 2 is higher than Nation 1 in both commodities X and Y; Reason: the capital must be relatively cheaper in Nation 2 than in Nation 1, so that producers in Nation 2 use relatively more capital in the production of both commodities to minimize their costs of production. ( factor abundance and its relationship to factor prices later explanation) . In other words, the relative capital price (r/w) is lower in Nation 2 than in Nation1. If r/w declined, producers would substitute K for L in the production of both commodities to minimize their costs of production. As a result, K/L would rise for both commodities, but Commodity Y continues to be K-intensive commodity (assumption).

  19. Factor Abundance • Definition of Factor Abundance 1. The terms of physical units It means the overall amount of capital and labor available to each nation. 2. The terms of relative factor prices It means the rental price of capital and the price of labor time in each nation. • Factor Abundance 1. Nation 2 is capital abundant if the ratio of the total amount of capital to the total amount of labor (TK/TL) available in Nation 2 is greater than that in Nation 1. (according to physical units of factor abundance)

  20. Factor Abundance 2. According to the definition in terms of factor prices, Nation 2 is capital abundant if the ratio of the rental price of capital to the price of labor time (PK/PL) is lower in Nation 2 than in Nation 1. Since the rental price of capital is usually taken to be the interest rate ( r ) while the price of labor time is the wage rate ( w ), PK/PL= r/w 3. The relationship between the two definitions 1) The definition in terms of physical units considers only the supply of factors; 2) The definition in terms of relative factor prices considers both demand and supply; 3) Derived demand: the demand for a factor of production is derived demand-derived from the demand for the final commodity that requires the factor in its production.

  21. Factor Abundance • Conclusion 1. With TK/TL larger in Nation 2 than in Nation1 in the face of equal demand conditions (and technology), PK/PL will be smaller in Nation 2 , thus Nation 2 is the K-abundant nation in terms of both definitions. 2. This is not always the case. Reason: the demand for Y and the demand for capital, could be so much higher in Nation 2 than in Nation 1 that the relative price of capital would be higher in Nation 2 than in Nation 1(alrough the relative greater supply of capital in Nation 2). In this case, Nation 2 would be considered K abundant according to the definition in physical terms and L abundant according to the definition in terms of relative factor prices.

  22. Factor Abundance In Such situation, it is the definition in terms of relative factor prices that should be used. 3.Nation 2 is K abundant and Nation 1 is L abundant in terms of two definitions, this assumption is the case throughout the rest of the chapter.

  23. Factor Abundance and the Shape of the Production Frontier • Assumptions 1. Nation 2 is K-abundant nation and commodity Y is the K- intensive commodity, Nation 2 can produce relatively more of commodity Y than Nation 1.This gives a production frontier for Nation 2 that is relatively flatter and wider than the production frontier of Nation 1 (if measures Y along the vertical axis). 2. Nation 1 is L-abundant nation and commodity X is the L- intensive commodities, Nation 1 can produce relatively more of commodity X than Nation 2. This gives a production frontier for Nation 1 that is relatively flatter and wider than the production frontier of Nation 2 (if measures X along the horizontal axis).

  24. Factor Abundance and the Shape of the Production Frontier • Figure 5.2 FIGURE 5-2 The Shape of the Production Frontiers of Nation 1 and Nation 2

  25. Factor Abundance and the Shape of the Production Frontier • Explanation of Figure 5.2 1. Nation 1’s production frontier is skewed toward the horizontal axis, which measures commodity X. Reason: Nation 1is a L-abundant nation and commodity X is L- intensive . 2. Nation 2’s production frontier is skewed toward the vertical axis, which measures commodity Y. Reason: Nation 2 is a K-abundant nation and commodity Y is K- intensive . • Case Studies 1. Case study 5-1: the relative resources endowments of various countries and regions. (page 123) 2. Case study 5-2: the capital stock per worker for a number of leading developed and developing countries. (page 124)

  26. 5.4 Factor Endowments and the Heckscher-Ohlin Theory • The Heckscher-Ohlin Theorem • General Equilibrium Framework of the Heckscher-Ohlin Theory • Illustration of the Hechscher-Ohlin Theory

  27. Eli Heckscher (1879 - 1952) • Brief Introduction He (StockholmNovember 24, 1879 - Stockholm December 23, 1952) was a Swedishpolitical economist and economic historian. Heckscher was born in Stockholm into a prominent Jewish family, son of the Danish-born businessman Isidor Heckscher and his spouse Rosa Meyer, and completed his secondary education there in 1897. He studied at university in Uppsala and Gothenburg, completing his PhD in Uppsala in 1907. He was professor of Political economy and Statistics at the Stockholm School of Economics from 1909 until 1929,when he

  28. Eli Heckscher (1879 - 1952) exchanged that chair for a research professorship in economic history, finally retiring as emeritus professor in 1945. According to a bibliography published in 1950, Heckscher had as of the previous year published 1148 books and articles, among which may be mentioned his study of Mercantilism, translated into several languages, and a monumental Economic history of Sweden in several volumes. Heckscher is best known for a model explaining patterns in international trade (Heckscher-Ohlin model) that he developed with Bertil Ohlin at the Stockholm School of Economics

  29. Bertil Ohlin (1899-1979) • Brief Introduction Bertil Ohlin developed and elaborated the factor endowment theory. He was not only a professor of economics at Stockholm, but also a major political figure in Sweden. He served in Riksdag (Swedish Parliament), was the head of liberal party for almost a 1/4 of a century. He was Minister of Trade during World War II. In 1979 Ohlin was awarded a Nobel prize jointly with James Meade for his work in international trade theory.

  30. Bertil Ohlin (1899-1979) • Bertil Gotthard Ohlin (pronounced [ˈbærtil uˈliːn]) (23 April1899 – 3 August1979) was a Swedisheconomist and politician. He was a professor of economics at the Stockholm School of Economics from 1929 to 1965. He was also chairman of the Swedish People's Party, a social-liberal party which at the time was the largest party in opposition to the governing Social Democratic Party, from 1944 to 1967. He served briefly as from 1944 to 1945 in the Swedish . • Ohlin's name lives on in one of the standard mathematical model of international free trade, the Heckscher-Ohlin model, which he developed together with Eli Heckscher. He was jointly awarded the Nobel Memorial Prize in Economics in 1977 together with the British economist James Meade "for their pathbreaking contribution to the theory of international trade and international capital movements".

  31. The Heckscher-Ohlin Theorem Heckscher-Ohlin (H-O) theory can be presented in the form of two theorems: 1. The so-called H-O theorem (which deals with and predicts the pattern of trade) 2. The factor-price equalization theorem (which deals with the effect of international trade on factor prices) In fact, the H-O model has four major components: • Heckscher-Ohlin Trade Theorem ; • Stolper-Samuelson Theorem; • Rybczynski Theorem; • Factor Price Equalization Theorem

  32. The Heckscher-Ohlin Theorem • H-O theorem (page 125) A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor. • Explanation of H-O theorem (factor endowment) 1. The basis for trade: Relative factor abundance or factor endowments as the basis for international trade or the basic cause or determinant of comparative advantage.

  33. The Heckscher-Ohlin Theorem 2. Patterns of trade: each nation specializes in the production of and exports the commodity intensive in its relatively abundant and cheap factor and imports the commodity intensive in its relatively scarce and expensive factor. • Conclusion H-O theorem explains comparative advantage rather than assuming it . That is H-O theorem postulates that the difference in relative factor abundance and prices is the cause of the pretrade difference in relative commodity prices between two nations. This difference in relative factor and relative commodity prices is then translated into a difference in absolute factor and commodity prices between the two nations. It is this difference in absolute commodity prices in the two nations that is the immediate cause of trade.

  34. The Heckscher-Ohlin Theorem • Conclusion The H-O theorem predicts the pattern of trade between countries based on the characteristics of the countries. The H-O theorem says that a capital-abundant country will export the capital-intensive good while the labor-abundant country will export the labor-intensive good. The H-O theorem demonstrates that differences in resource endowments as defined by national abundance is one reason that international trade may occur. Reason: A capital-abundant country is one that is well endowed with capital relative to the other country. This gives the country a propensity for producing the good which uses relatively more capital in the production process .

  35. General Equilibrium Framework of the Heckscher-Ohlin Theory • Figure 5.3 1. The tastes and the distribution in the ownership of factors of production together determine the demand for commodities. 2. The demand for commodities determines the derived demand for the factors required to produce them. 3. The demand for factors of production, together with the supply of the factors, determines the price of factors of production under perfect competition. 4. The price of factors of production, together with technology, determines the price of final commodities. 5. The difference in relative commodity prices between nations determines comparative advantage and the pattern of trade

  36. FIGURE 5-3 General Equilibrium Framework of the Heckscher-Ohlin Theory

  37. General Equilibrium Framework of the Heckscher-Ohlin Theory • Conclusion 1. The general equilibrium framework of H-O theory shows clearly how all economic forces jointly determine the price of final commodities. 2. Out of all economic forces working together, H-O isolates the difference in the physical availability or supply of factors of production among nations ( in the face of equal tastes and technology) to explain the difference in relative commodity prices and trade among nations. And different supply of factors of production in different nations have different factor prices. 3. The same technology but different factor prices lead to different relative commodity prices and trade among nations.

  38. Illustration of the Hechscher-Ohlin Theory • Figure 5.4 FIGURE 5-4 The Heckscher-Ohlin Model

  39. Illustration of the Hechscher-Ohlin Theory • Explanation of Figure 5.4 1. Left panel: it shows the production frontier of Nation 1 and 2 1) Nation 1’s production frontier is skewed along the X-axis; 2) Nation 2’s production frontier is skewed along the Y-axis; 3) Indifference curve Ⅰis tangent to Nation 1’s production frontier at point A while point A’ in Nation 2’s (due to the equal tastes); 4) A represents Nation 1’s equilibrium points of production and consumption while A’ represents Nation 2’s equilibrium points of production and consumption in the absence of trade; 5) Since the equilibrium-relative commodity prices of PA﹤PA’, Nation has a comparative advantage in commodity X while Nation 2 in Commodity Y.

  40. Illustration of the Hechscher-Ohlin Theory 2. Right panel: With trade the equilibrium point 1) Nation 1 specializes in the production of commodity X while Nation 2 in commodity Y; 2) Specialization in production proceeds until the transformation curves of the two nations are tangent to the common relative price line PB. 3) After trade, Nation 1 will export commodity X in exchange for commodity Y and consume at point E on indifference curveⅡ. Nation 2 will export commodity Y in exchange for commodity X and consume at point E’ on indifference curveⅡ. 4) PX/PY=PB, equilibrium point; if PX/PY﹥PB, Nation 1 wants to export more of commodity X than Nation 2 wants to import at this high relative price of X, and PX/PY falls toward PB; on the contrary, if PX/PY﹤PB, Nation 1 wants to export less of commodity X than Nation 2 wants to import , and PX/PY rises toward PB.

  41. Illustration of the Hechscher-Ohlin Theory • Conclusion Both nations gain from trade because they consume on higher indifference curve Ⅱ. • Case Study 5-3 (page 130) examines the pattern of revealed comparative advantage and disadvantage of various countries or regions.

  42. 5.5 Factor-Price Equalization and Income Distribution • The Factor-Price Equalization Theorem • Relative and Absolute Factor-Price Equalization • Effect of Trade on the Distribution of Income • The Specific-Factors Model • Empirical Relevance

  43. The Factor-Price Equalization Theorem • The Content of Factor-Price Equalization Theorem The factor-price equalization theorem says that when the prices of the output goods are equalized between countries, as when countries move to free trade, then the prices of the factors (capital and labor) will also be equalized between countries. This implies that free trade will equalize the wages of workers and the rents earned on capital throughout the world. The factor-price equalization theorem was rigorously proved by Paul Samuelson (1970 Nobel prize in economics) , so it was also called H-O-S theorem. ( page 129)

  44. The Factor-Price Equalization Theorem • Explanation of H-O-S Theorem 1. In Nation 1 the relative price of commodity X is lower than in Nation 2, it means that the relative price of labor or wage rate is lower in Nation1 in the absence of trade; 2. With trade, Nation 1 specializes in the production of commodity X (L-intensive commodity) and reduces its production of commodity Y(K-intensive commodity), the demand for labor rises causes the wages to rise while the relative demand for capital falls and its rate falls; on the other hand, in Nation 2 wages fall and rate rises;

  45. The Factor-Price Equalization Theorem • Conclusion 1. International trade tends to reduce the pretrade difference in w and r between the two nations; 2. International trade keeps expanding until relative commodity prices are completely equalized, which means that relative factor prices have also become equal in two nations.

  46. Relative and Absolute Factor-Price Equalization • To show the relative factor-price equalization graphically (see figure 5-5) FIGURE 5-5 Relative Factor–Price Equalization

  47. Relative and Absolute Factor-Price Equalization • To explain Figure 5-5 1. The horizontal axis measures the relative price of labor (w/r) while the vertical axis measures the relative price of commodity X (PX/PY); 2. Each w/r is associated with a specific PX/PY ratio (due to the perfect competition and uses the same technology, one to one relationship between w/r and PX/PY); 3. Without trade, Nation 1 is at Point A with w/r=(w/r)1 and PX/PY=PA while Nation 2 is at Point A’ with w/r=(w/r)2 and PX/PY=PA’; 4. With trade, Nation 1 will produce more of commodity X due to the PA ﹤PA’ in the relative price of commodity X in Nation 1 than Nation 2 while Nation 2 will produce more of commodity Y .

  48. Relative and Absolute Factor-Price Equalization 5. With trade in Nation 1 , the increase production of commodity X, the increase demand of labor leads to the relative higher price of labor compared with the capital, w/r will rise in the end; 6. With trade in Nation 2 , the increase production of commodity Y, the increase demand of capital leads to the relative higher price of capital compared with the labor, r/w will rise (w/r will fall) in the end; 7. The upward movement in Nation 1 and downward movement in Nation 2 will continue until point B=B’, at which PB=PB’ and w/r=(w/r) ﹡(only at this point both nations operate under perfection competition and use the same technology by assumption)

  49. Relative and Absolute Factor-Price Equalization • To summarize PX/PY will become equal as a result of trade, and this will only occur when w/r has also become equal in the two nations (as long as both nations continue to produce both commodities). • Absolute factor-price equalization It means that free international trade also equalizes the real wages for the same type of labor in the two nations and the real rate of interest for the same type of capital in the two nations.

  50. Relative and Absolute Factor-Price Equalization • Assumptions of the relative and absolute factor-price equalization • Perfect competition in all commodities and factor markets; • The same technology; • The constant returns to scale; • Conclusion • Trade equalizes the relative and absolute returns to homogeneous factors; • Trade acts as a substitute for the international mobility of factors of production in its effect on factor prices; • Trade operates on the demand for factors, factor mobility operates on the supply of factors.

More Related