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

Relative Factor Intensity : Full employment: Y X A B* L constant K constant 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)). C D B E F

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

AT Point A (continue):

At Point B Relative Supply

Two Countries: H and F: H is more capital abundant. H’s Relative Supply is biased towards X:

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

Full Employment Supply of X and Y :

The Heckscher-Ohlin Proposition #1: Any country will export the good which makes intensive use in its production of relative abundant factor supply.

Full Employment Factor Prices:

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

The 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.