1. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Resources and Trade: The Heckscher-Ohlin Model 1.A Model of Two-Factor Economy 2.Effects of International Trade Between Two-Factor Economies2.Effects of International Trade Between Two-Factor Economies 3.Empirical Evidence on the Heckscher- Ohlin Model3.Empirical Evidence on the Heckscher- Ohlin Model 4. Summary 1

2. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT 1.A Model of a Two-Factor Economy (1).Assumptions of the Model (2).Factor Prices and Goods Prices (3).Resources and Output 2

3. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (1).Assumptions of the Model The economy produce two goods: cloth and food two inputs: labor and land labor and land are in limited supply then, define: a TC, a LC, a TF, a LF, L, T * Factor prices: w/r 3

4. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-1 Input Possibilities in Food Production 4 II a TF a LF Input combinations that produce one calorie of food

5. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-2 Factor Prices and Input Choices 5 CC FF w/r T/L

6. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (2).Factor Prices and Goods Prices SS P C /P F w/r Figure 4-3 Factor Prices and Goods Prices 6

7. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-4 From Goods Prices to Input Choices CC FF w/r T/L CC FF w/r T/L SS P C /P F w/r 2 w/r 1 P C /P F 2 P C /P F 1 T C /L C 1 T C /L C 2 T F /L F 1 T F /L F 2 7

8. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (3).Resources and Output 8 1 C F OCOC OFOF LCLC LFLF TCTC TFTF Figure 4-5 The Allocation of Resources

9. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-6 An Increase in the Supply of Land 9 1 C F1F1 OCOC OF1OF1 LCLC LF1LF1 TCTC 2 F2F2 LF2LF2 TF2TF2 TF1TF1 OF2OF2

10. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-7 Resources and Production Possibilities 10 QF2QF2 QF1QF1 QFQF QC2QC2 QC1QC1 QCQC TT 1 TT 2 Slope=-P C /P F 1 2 Generally, an economy will tend to be relatively effective at producing goods that are intensive in the factors with which the country is relatively well-endowed.

11. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT 2.Effects of International Trade Between Two-Factor Economies (1).Relative Prices and the Pattern of Trade (2).Trade and the Distribution of Income (3).Factor Price Equalization (4). Case Study: North-South Trade and Income Inequality 11

12. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT 12 1 (1).Relative Prices and the Pattern of Trade Assumption: Two countries have the same relative demands have the same technology level Home: labor-abundant (L/T > L*/ T*) Foreign: land-abundant factor can not move between countries completely competition 12

13. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (1).Relative Prices and the Pattern of Trade... P C /P F Q C +Q C * Q F +Q F * 1 2 3 RS * RS RD Figure 4-8 Trade Leads to a Convergence of Relative Prices 13

14. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Result: Countries tend to export goods whose production is intensive in factors with which they are abundantly endowed Heckscher-Ohlin Theorem: A country will export that commodity which uses intensively its abundant factor and import that commodity which uses intensively its scarce factor. 14

15. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (2).Trade and the Distribution of Income In Home, where the relative price of cloth rises: -----Laborers are made better off and landowners are made worse off. In Foreign, where the relative price of cloth falls, the opposite happens: Owners of a countrys abundant factors gain from trade, but owners of a countrys scarce factors lose. 14

16. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Difference between the specific factors model and the Heckscher-Ohlin model in terms of income distribution effects: –The specificity of factors to particular industries is often only a temporary problem. –In contrast, effects of trade on the distribution of income among land, labor, and capital are more or less permanent.

17. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (3).Factor Price Equalization Trade leads to equalization of factor prices. In reality, factor prices are not equalized (Table 4-1). 15

18. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Three assumptions are in reality untrue.both countries produce both goods.technologies are the same.trade actually equalize the prices of goods in the two countries

19. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Table 4-1 Comparative International Wage Rates United States Germany Japan Spain South Korea Portugal Mexico Sri Lanka* 100 121 111 55 41 24 12 2 Country Hourly compensation of production workers,2000 16

20. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (4). Case Study: North-South Trade and Income Inequality North-South trade in manufactures fits to the factor proportions model much better. 17

21. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Table 4-2 Composition of Developing-Country Exports 21 1973 1995 30 24 47.5 22.5 22 62.5 Agricultural Products Mining Products Manufactures Goods

22. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT 3.Empirical Evidence on the Heckscher-Ohlin Model (1).Testing the Heckscher-Ohlin Model (2).Implications of the Tests 22

23. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (1).Testing the Heckscher-Ohlin Model.Tests on U.S. Data..Tests on Global Data..Tests on North-South Trade..The Case of the Missing Trade. 23

24. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT.Tests on U.S. Data..Leontief paradox Wassily Leontief found that U.S. export were less capital-intensive than U.S. imports. 24

25. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT YearFactorsExportImportExport/ Import 1947 Capital 2,550,7893,091339 1.30 Labor hours 182170 K/L14,10018,180 1956 Capital 2256,8002,303,400 1.06 Labor hours 174168 K/L12,97713,726 1971 (Bald win) Capital 1,876,0002,132,000 1.27 Labor hours 131119 K/L14,20018,000

26. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT.the explanation of Leontief paradox labor resources factor intensity reversal (figure 4-9) demand reversal (figure 4-10) 26

27. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-9 Effects of factor intensity reversal 27 K L w1w1 w2w2 K F K C kCkC kFkF

28. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Figure 4-10 Effects of Demand Reversal on International Trade 28 Q C, Q C Q F Q F QFQF Q F QCQC Q C P C /P F

29. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Table 4-4: Testing the Heckscher-Ohlin Model

30. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT (2).Implications of the Tests Empirical results concerning the Hec kscher-Ohlin theory do not support its pre dictions concerning resou-rce endowment s explaining patter-ns of trade. 30

31. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT 4. Summary This chapter proceeds by first presentin g a general equilibrium model of an econ omy with two goods produced by two fac tors under the assumption of fixed coeffi ci-ent production functions. 31

32. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Many of the important results of interna tional trade theory are developed. These i nclude: the Ry-bcznski Theorem, the Stol per-Sam-uelson Theorem, and the Factor Price Equalization Theorem. 32

33. INTERNATIONAL ECONOMICS 03/01/20 COPY RIGHT Implications of the Heckscher-Ohlin m odel for the pattern of trade among countr ies are discussed, as are the failures of em pirical evidence to confirm the predicti-o ns of the theory. 33