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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
...

Abroad can buy Y from Home cheaper than producing itself

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


Allowing trade

Y

Y

B
A

Y

*

X

X

X

*

Home production shifting towards Y reduces the relative price of X

Allowing trade
Y

Y

B
A

Y

*

A*
B*

X

X
1

2

X

*

Trade results in the equalisation of commodity prices between the two
countries
Both countries still produce both goods
specialisation not complete (c
...
Ricardian model)

Gains from trade

Y

Y

B

C

Y

*

C*
B*

X

X

X

*

Both countries consume on indierence curves outside their PPFs aggregate gains from trade

Pattern of trade
Imports of X

Y
B

Exports
of Y
C
Imports
of Y

C*
B*

X
Exports of X

Home (capital abundant) exports good Y (capital intensive)
Abroad (labour abundant) exports good X (labour intensive)

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
...

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

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

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