1. Trade Models: Extensions and Applications
Factor Endowment Theory (Heckscher – Ohlin
Factor Price Equalization(Samuelson)
  Does Factor Endowment Theory Work?
Does Factor Price Equalization Happen?

2. Trade Models: Extensions and Applications
Theory of Overlapping Demand
Intraindustry Specialization and Trade
Dynamic Comparative Advantage
Industrial Policy
Trade in Services
Product Life Cycle Model
Supply – Demand Model of Trade
Environmental Protection and Costs
Transportation Costs

3. Factor Endowment Theory (Heckscher – Ohlin)
Focus on Supply: Technology and input factors
Labor
Land
Capital

4. Factor Endowment Theory (Heckscher – Ohlin)
Assume: everyone uses the same technologies to make things.
 Then: a nation has comparative advantage in things that use a lot of its relatively abundant and cheap factor.

5. Factor Endowment Theory (Heckscher – Ohlin)
Also assume: everyone has the same tastes.  
Then:
A nation will export things that use a lot of its relatively abundant and cheap factor.
A nation will import things that use a lot of its relatively scarce and expensive factor.

6. 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.

7. Factor Price Equalization
The factor’s wage is equalized in the exporting and importing countries.
Trade substitutes for factor flows.

8. Does Factor Endowment Theory Work?
Export:Import Ratios
Product US
Japan
FRG UK
Technology-intensive
Standardized
Labor-intensive
Services
Primary products
1.5
0.4
0.6
5.7
1.1
1.0
0.7
0.0
2.4
0.8
0.3
1.4
1.3
US has relative abundance of scientific workers
… and US does export hi – tech things.

9. Does Factor Price Equalization Theory Work?
In US, skilled workers are relatively abundant.
TRADE  Rich get richer Poor get poorer.
Globalization disciplines workers
Globalization disciplines all factors

10. 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. 

11. 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

12. 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

13. Supply – Demand Model of Trade
If the production proceeds under 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.

14. Free trade under increasing costs
Transportation costs
Free trade under increasing costs
No transportation costs
United States
Auto price ($ thous.) S
Canada S F 8 a b c d 6 E 4 D D
Autos 6 4 2 2 4 6
Autos
exports
imports

15. Free trade under increasing costs
Transportation costs
Free trade under increasing costs
Transportation costs of $2000 per auto
United States
Auto price ($ thous.) S
Canada S F 8 7 g h e f 5 4 E D D
Autos 5 4 3 3 4 5
Autos
exports
imports