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Heckscher-Ohlin

Outline

1

Hechscher-Ohlin (factor proportions) model
Basic model in autarky
Allowing trade
Key results
Summary

2

Alternative models - Competitive advantage
External economies of scale

3

Recap of trade theories

Ricardian model of comparative advantage

Trade results from dierences in technology
...

Y

Y

Y

*

X

X

X

*

Home (capital abundant) ability to produce Y (capital intensive)
greater than abroad
...

Y

Y

Y

*

X

X

X

*

Home (capital abundant) ability to produce Y (capital intensive)
greater than abroad
...

Abroad can buy Y from Home cheaper than producing itself

Overall demand for X in Home decreases, and demand for Y increases
...


Allowing trade

∗
px
px
Dierence in autarky relative prices py > py suggests potential gains
∗
from trade

Home can buy (labour intensive) X abroad cheaper than can produce
it in autarky
...

Home production shifts towards producing

Y
...
f
...
f
...

Dierences in factor endowments provide basis for trade
provides explanation of trade in factor intensive commodities
labour intensive, e
...
clothing
capital intensive, e
...
manufacturing plant
natural resource intensive, e
...
fuels, embedded water

Countries specialise (partially) in goods which use most intensively
their abundant factors

Key result 1

Heckscher-Ohlin theorem

A country will export the commodity that intensively uses its relatively
abundant factor
...
g
...
g
...
g
...

Trade aects distribution of incomes within countries through price
eects

Abundant factor made better o by trade, scarce factor made worse o
...

Trade aects distribution of incomes within countries through price
eects

Abundant factor made better o by trade, scarce factor made worse o
...

Trade aects distribution of incomes within countries through price
eects

Abundant factor made better o by trade, scarce factor made worse o
...

Trade aects distribution of incomes within countries through price
eects

Abundant factor made better o by trade, scarce factor made worse o
...

Trade aects distribution of incomes within countries through price
eects

Abundant factor made better o by trade, scarce factor made worse o
...

if abroad experiences immigration ⇒ increased labour endowment
produces more X (labour intensive)
produces less Y (capital intensive)
...

if abroad experiences immigration ⇒ increased labour endowment
produces more X (labour intensive)
produces less Y (capital intensive)
...
g
...

Countries export goods that use their well-endowed factor most
intensively
comparative advantage determined by factor endowments and factor
intensities of goods

Trade in goods substitutes for trade in factors
factor price equalisation
trade reduces real wages in capital abundant countries

Relatively abundant factors gain from trade and relatively scarce
factors lose real income
wages rise in labour abundant (developing?) countries

Factor growth results in increased output of the good using that factor
most intensively
can reverse pattern of trade over time

Summary of H-O model

Dierences in relative factor endowments provide a source of gains from
trade
...

Countries export goods that use their well-endowed factor most
intensively
comparative advantage determined by factor endowments and factor
intensities of goods

Trade in goods substitutes for trade in factors
factor price equalisation
trade reduces real wages in capital abundant countries

Relatively abundant factors gain from trade and relatively scarce
factors lose real income
wages rise in labour abundant (developing?) countries

Factor growth results in increased output of the good using that factor
most intensively
can reverse pattern of trade over time

Summary of H-O model

Dierences in relative factor endowments provide a source of gains from
trade
...

Countries export goods that use their well-endowed factor most
intensively
comparative advantage determined by factor endowments and factor
intensities of goods

Trade in goods substitutes for trade in factors
factor price equalisation
trade reduces real wages in capital abundant countries

Relatively abundant factors gain from trade and relatively scarce
factors lose real income
wages rise in labour abundant (developing?) countries

Factor growth results in increased output of the good using that factor
most intensively
can reverse pattern of trade over time

Reading

Krugman, P
...
Obsfeld and M
...
9th ed
...
(Library 337
KRU)
...
110-140
...
, J
...
Kaempfer and K
...
New York: McGraw-Hill
...
repec
...
html
...
99-126
...
g
...
g
...
174-178
Krugman et al (2011) Chapter 7, pp
...


Summary of traditional models

Ricardian model
relative dierences in technology, reected in dierences in the slopes
of countries PPFs, lead to potential gains from trade
Countries specialise completely
Distribution of gains from trade aected by economic size of countries

Heckscher-Ohlin model
Dierences in relative factor endowments provide a source of gains
from trade
...

comparative advantage determined by factor endowments and factor
intensities of goods
abundant factors gain from trade and scarce factors lose

Summary of alternative models

Increasing returns to scale
oers explanation of trade between identical countries
gains from specialisation without comparative advantage

External economies of scale
pattern of trade indeterminate
tend to reinforce existing patterns of trade

Imperfect competition
trade in similar goods between countries
gains from increased market size (sharing xed costs)
increased variety

Summary of alternative models

Increasing returns to scale
oers explanation of trade between identical countries
gains from specialisation without comparative advantage

External economies of scale
pattern of trade indeterminate
tend to reinforce existing patterns of trade

Imperfect competition
trade in similar goods between countries
gains from increased market size (sharing xed costs)
increased variety

Summary of alternative models

Increasing returns to scale
oers explanation of trade between identical countries
gains from specialisation without comparative advantage

External economies of scale
pattern of trade indeterminate
tend to reinforce existing patterns of trade

Imperfect competition
trade in similar goods between countries
gains from increased market size (sharing xed costs)
increased variety



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