1 / 48

HO Model – Factor Proportions

HO Model – Factor Proportions. INTERNATIONAL ECONOMICS, ECO 486. Bertil Ohlin 1899-1979. Eli F. Heckscher, 1879-1952. Learning Objectives. Examine the need to build a new model Understand five more assumptions Prove Rybczynski Theorem Prove HO Theorem

hall-sharpe
Télécharger la présentation

HO Model – Factor Proportions

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. HO Model – Factor Proportions • INTERNATIONAL ECONOMICS,ECO 486 Bertil Ohlin 1899-1979 Eli F. Heckscher, 1879-1952.

  2. Learning Objectives • Examine the need to build a new model • Understand five more assumptions • Prove Rybczynski Theorem • Prove HO Theorem • Prove Factor-Price Equalization Theorem • Prove Stolper-Samuelson Theorem.

  3. Classical Model • Strengths • Trade is mutually beneficial • High & low wage countries may trade • Explains some of the trade patterns we observe • Weaknesses • Why does so much trade occur among developed countries? • Why does technology differ across countries?

  4. Heckscher-Ohlin (HO) Model • Built upon observed differences among • Factors that countries possess • Factors required to produce various goods • Insights • Causes of trade • Effects of trade on factor prices • Effect of economic growth on trade patterns • Political behavior

  5. Assumptions for HO Model • Keep assumptions 1 through 10 • Drop assumptions 11 & 12 • Add assumptions 13 through 17

  6. Assumption #13 • There are two factors of production, labor (L), and capital (K). Owners of capital are paid a rental payment (R) for the services of their assets, and labor receives a wage payment (W).

  7. Assumption #14 • The technologies available to each country are identical. • Any technology is available to any country • Factor prices determine the technology chosen • Assumes away the Ricardian explanation of the source of comparative advantage.

  8. Unit Capital input aTS , in machines per bushel Input combinations that produce one bushel of Soybeans // Unit Labor input aLF , in hours per bushel A Model of a Two-Factor Economy Input Possibilities in Soybean Production

  9. Assumption #15 • The production of T is labor intensive relative to the production of S • That is, T requires more labor per machine • Implies that production of S is capital intensive (relative to the production of T). • That is, S requires more machines per worker

  10. K per Worker for US Industries Thousands of 1972 dollars. P. 89, 6th edition, Husted & Melvin, International Economics

  11. Relative price of Textiles, PT/PS PW Wage-rental ratio, w/r The Magnification Effect A change in the relative price of a good (say, T) results in a proportionately larger change in the price of its intensive factor (Labor).

  12. Wage-rental ratio, w/r 1 2 Capital-labor ratio, K/L The relative price of a resource affects the intensity of its use. Which line represents the Capital-intensive industry, 1 or 2?

  13. Wage-rental ratio, w/r Mag. Effect Textiles Soybeans (w/r)2 (w/r)1 Capital- labor Ratio, K/L Relative price of T, PT/PS (PT/PS)1 (KS/LS)2 (KT/LT)2 (KT/LT)1 Increasing Increasing Changes in relative prices affect the distribution of income (PT/PS)2 (KS/LS)1

  14. Assumption #16 • Country A is relatively capital abundant, while B is labor abundant.

  15. K per Worker: Selected Countries 1985 international prices. Item 4.2, page 91, 6th edition Husted & Melvin

  16. Quantity definition of factor abundance • Country A is relatively capital abundant, if the ratio of its capital stock to its labor force (K/L) is greater than that of the other country:

  17. Increasing Opportunity Cost in A S is K-intensive A is K-abundant 20 18 14 America’s PPF TEXTILES, T (millions of yards per year) 12 6 0 2 4 8 12 10 16 SOYBEANS, S (millions of bushels per year)

  18. Increasing Opportunity Cost in B T is L-intensive B is L-abundant 40 TEXTILES, T (millions of yards per year) 20 Britain’s PPF 0 5 10 SOYBEANS, S (millions of bushels per year)

  19. Assumption #17 • Tastes in the two countries are identical. • Given same GDP & prices, same choice • Implies that supply conditions alone determine the direction of comparative advantage (CA). • Different tastes would imply different demand • Could reverse the direction of CA.

  20. The importance of assuming identical tastes.

  21. 2 1 Tastes differ markedly, reversing the direction of Comparative Adv. Relative price of S, PS/PT RSB RSWORLD RSA (PS/PT )A (PS/PT )B RDA RDB Relative quantity of S, QSQ*SQS + Q*S QTQ*T,QT + Q*T

  22. Rybczynski Theorem • At constant world prices, if a country experiences an increase in the supply of one factor, it will produce more of the product intensive in that factor and less of the other. • See Figure 4.7 , page 103 • Read Item 10.1 “The Dutch Disease,” page 289, 7th edition of Husted & Melvin

  23. L__ O_ __ 1 K_ K_ __ O_ L_ Increasing Increasing Increasing Increasing Which is the K-intensive industry? Labor used in ________________ production Capital used in ________ production Capital used in _____ production Labor used in ________________ production

  24. Rybczynski Theorem • How do the outputs of the two goods change when the economy’s resources change? • Increase the amount of one factor, say K, and observe the results

  25. O2S L1S L2S O1S K1T 1 K1S T K2T K2S 2 S1 S2 OT L1T L2T Increasing Increasing Increasing Increasing K increases. S (K int.) expands. S needs more labor. T must contract L used in S production K used in S production K used in T production L used in T production

  26. Output of T, QT Slope = -PS/PT Slope = -PS/PT Output of S, QS An increase in K in Country A. 1 Q1T 2 Q2T PPF2 PPF1 Q1S Q2S

  27. Output of T, QT 2 Slope = -PS/PT Q2T Slope = -PS/PT Q1T 1 PPF2 PPF1 Output of S, QS Q2S Q1S An increase in L in country B.

  28. Rybczynski Theorem • Also helps us to understand that an economy will tend to be more productive in industries that use its abundant factor intensively.

  29. Heckscher-Ohlin Theorem • A country will export the goods whose production is intensive in the factor with which that country is abundantly endowed.

  30. General equilibrium for a closed economy; increasing opportunity costs

  31. Proof of the HO theorem

  32. With free trade, there will be one world relative price for S (PS/PT) and T (PT/PS). • As PS/PT rises in Country A, their S industry expands while their T industry contracts. • As PS/PT falls in Country B, their S industry contracts while their T industry expands. • Tricky to draw the general equilibrium solution, so let’s try it together.

  33. HO Model: Trade Equilibrium in a special case (easier to draw) Textiles, QT A’s PPF Soybeans, QS Q* A* D and D* A Q B’s PPF

  34. Autarky in A 18 a 15 CIC0 TEXTILES, T (millions of yards per year) 12 0 13 10 16 SOYBEANS, S (millions of bushels per year)

  35. Autarky in B 40 a 30 CIC0 TEXTILES, T (millions of yards per year) 20 Britain’s PPF 10 0 4 6.5 9 SOYBEANS, S (millions of bushels per year)

  36. Relative price of S, ______ RSB RSA 3 2 1 RD Relative quality of S, Trade Leads to a Convergence of Relative Prices

  37. 3 1 5 4 Trade Leads to a Convergence of Relative Prices Relative price of S, PS/PT RSB RSWORLD RSA 2 RD Relative quantity of S, QSQ*SQS + Q*S QTQ*T,QT + Q*T

  38. With free trade, there will be one world relative price for S (PS/PT) and T (PT/PS). • As PS/PT rises in Country A, their S industry expands while their T industry contracts. • As PS/PT falls in Country B, their S industry contracts while their T industry expands. • Tricky to draw the general equilibrium solution, so let’s try it together.

  39. International Trade Equilibrium • Incomplete specialization in Comparative Advantage good. • Community Indifference Curve (CIC) & Terms of Trade line (ToT) tangent at consumption point • Congruent trade triangles imply balanced trade.

  40. HO Trade Equilibrium – general case A produces more S, less T. Complete specialization in their comparative advantage good is unlikely. A exports S, imports T B produces more T, less S B exports T, imports S Their trade triangles are congruent.

  41. Derivation of national supply and demand curves; increasing opp. cost

  42. National supply and national demand in the classical and HO models.

  43. National supply and national demand in the HO model

  44. Stolper-Samuelson Theorem • Free international trade benefits the abundant factor and harms the scarce factor.

  45. As PS/PT rises in Country A, PT/PS and w/r fall. • Look back at Slide 16. • A is K abundant (L scarce) • As PS/PT falls in Country B, PT/PS and w/r rise. • B is L abundant (K scarce)

  46. Factor-Price Equalization (FPE) Theorem • Given all the assumptions of the HO model, free trade will lead to the international equalization of individual factor prices. • Look again at Slide 16. • One relative price for T, PT/PS • One wage-rental ratio, w/r

  47. Factor-Price Equalization? “There isn’t any.” Why not? • Some goods are not produced in some countries. • Productivity (technology) does differ between countries. • Goods’ prices differ due to natural and artificial barriers to trade.

  48. The End of Chapter 4 See “Isocosts, Isoquants, and Proofs”in eco486 main folder See Specific-Factors Model: 03specific_factors_jde.ppt in Krugman folder

More Related