1. Trade Models: Extensions and Applications
Factor Endowment Theory (Heckscher – Ohlin)
Does it work?
Leontief Paradox
Factor Price Equalization (Stolper-Samuelson)
Does it happen?
Globalization and its discontents
U.S. income distribution: the gulf widens
Intra-industry trade 
Product differentiation and trade
Overlapping demands
Increasing returns to scale
Product life-cycle
Supply – Demand Model of Trade: Buy Low Sell High
Price convergence
Transportation costs price wedge

2. Factor Endowment Theory (Heckscher – Ohlin)
Focus on Supply:
Technology and input factors: labor, capital, land (natural resources)
Assume: everyone uses the same technologies to make things.
Also assume competitive factor markets: within each country, the factor’s “wage” is the same in all industries.
Then: a nation has comparative advantage in things that use a lot of its relatively abundant and cheap factor.
Also assume everyone has roughly the same tastes.
Then: a nation exports things that use a lot of its relatively abundant and cheap factor.

4. Factor endowments of countries & regions, as a percentage of the world total
Capital
Skilled Labor
Unskilled Labor
All Resources
United States
20.8%
19.4%
2.6%
5.6%
European Union
20.7
13.3
5.3
6.9
Japan
10.5
8.2
1.6
2.9
Canada
2.0
1.7
0.4
0.6
Mexico
2.3
1.2
1.4
China
8.3
21.7
30.4
28.4
India
3.0
7.1
15.3
13.7
Hong Kong, South Korea, Taiwan, Singapore
2.8
3.7
0.9
Eastern Europe, including Russia
6.2
3.8
8.4
7.6
OPEC
4.4
6.7
Rest of the world
17.2
15.5
26.6
24.8
Total
100.0
Source: Wm. R. Cline,Trade and Income Distribution, IIE, 1997, pp

5. Heckscher-Ohlin, skills, and comparative advantage
Education:Land Area
Leonief Paradox?
For US (~1950) (Capital/labor)Export Industries < (Capital/labor)Import Competing Industries
Explanation: Considering human capital, US is “labor” abundant

6. Education, skill intensity, and U.S. import shares, 1998

7. Factor Price Equalization
A nation exports things that use a lot of its relatively abundant and cheap factor.
In the exporting country, demand for this abundant factor increases.
The wage of the abundant factor increases.
In the importing country, where this factor is scarce and expensive, demand for this factor decreases.
The wage of the scarce and expensive factor decreases.
The factor’s wage is equalized in the exporting and importing countries.
Trade substitutes for factor flows.
There are winners and losers from trade
Specific factor issues:
Factor specific to an import-competing industry loses big from trade

8. Indexes of hourly compensation, manufacturing workers, 2006 (U. S
Indexes of hourly compensation, manufacturing workers, 2006 (U.S.=100) Not all “labor” is equal

9. Does Factor Price Equalization Theory Work?
In US, skilled workers are relatively abundant.
Skilled worker wages are relatively low in US
TRADE  Rich get richer in US Poor get poorer.
Widened gap between skilled and unskilled wages in US explained in part, but small part, by globalization.
Increased importance of education/human capital in high-tech economy
But globalization disciplines all workers
Outsourcing of high-skilled jobs: Indian engineers/computer scientists
Human capital/productivity gaps  Wage differences persist
Productivity is both individual and social
Rule of law/The human capital of your co-worker
Labor not only factor subject to competitive pressures
Globalization disciplines all factors

10. Much trade is in imports and exports of roughly the same kinds of goods Index of Intraindustry Trade: (Exports/Imports) US Industries, 1993 & 2007
Inorganic chemicals .99 Power-generating machinery .97/.99 Electrical machinery .96/.72 Organic chemicals .91 Medical and pharmaceutical .86 Office machinery .81 Telecommunications equipment .69 Road vehicles .65 Iron and steel .43 Clothing and apparel .27 Footware .00/.00
Ex/Im
.43
3.8
.79
.72
.44
1.5
1.4
.34

11. Trade Models: Extensions and Applications
Intraindustry Specialization & TradeIncreasing Returns
Dynamic Comparative Advantage
Industrial Policy: Promote champions?
Theory of Overlapping Demand
Product Life Cycle Model
Supply – Demand Model of Trade
Environmental Protection and Costs
Transportation Costs

12. Theory of Overlapping Demands
Most US trade in manufactures is with other rich nations.
Linder: countries with similar incomes have similar tastes and patters of demand.
Firms first establish themselves in home market.
Firms find foreign markets where demands overlap. 
Product Life Cycle Theory…Think Gaming
Good is introduced in home market
Technological breakthrough/Specialized inputs/High Risk Small scale/Local Mkt
Success/growth/cost reduction
Domestic industry exports the good
Production becomes routine
Foreign production begins
Domestic industry loses competitive advantage
Import competition begins
Observe both exports and imports of same stuff

13. Intraindustry Trade: Import and Export the “Same” Thing
Homogeneous products
· Transport savings near borders
· Seasonal reasons
Differentiated products
· Focus on particular product in industry
Exploit economies of scale
Serve domestic “majority” and overlapping foreign demand
Explaining trade patterns: Summary
Comparative advantage owing to factor endowments
 Net exports by industry (“Interindustry” trade)
Product differentiation and economies of scale
 Intraindustry trade
Similar endowments – Similar tastes
Product Life Cycle: Technology evolves from breakthrough to routine
What you export/What you import  History and accident

14. Supply – Demand Model of Trade
In the absence of trade, the same good will sell for different prices in different places.
An opportunity presents itself:
BUY LOW – SELL HIGH

15. Free trade under increasing costs
No transportation costs

16. Free trade under increasing costs
Transportation costs
Free trade under increasing costs
Transportation costs of $2000 per auto

18. Supply – Demand Model of Trade
If there are increasing costs
Cost and price in the exporting country increases
Cost and price in the importing country decreases
Cost and price in the two countries converge.

19. Trade effects of government regulation e.g., Environmental Standards

20. Supply and Demand of Calculators
Sweden
Norway
Price
Quantity Supplied
Quantity Demanded
$ 0 5 10 15 20 25 30 35 40 45
200
400
600
800
1,000
1,200
1,400
1,600
1,800