Scribd Logo
Upload

Welcome to Scribd!

  • 112 views

    Chapter 5

    Uploaded by

    Muhammed Embaby
    The chapter discusses the Heckscher-Ohlin theory of international trade. The theory is based on two theorems. The Heckscher-Ohlin theorem states that countries will export goods that intensively use their abundant and cheap factors, and import goods that intensively use their scarce and expensive factors. The factor price equalization theorem states that international trade will equalize factor prices between countries. The chapter outlines the assumptions of the theory and defines key terms like factor intensity and factor abundance. It also discusses empirical tests of the Heckscher-Ohlin model, such as the Leontief Paradox.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Chapter 5

    Uploaded by

    Muhammed Embaby
    112 views19 pages
    The chapter discusses the Heckscher-Ohlin theory of international trade. The theory is based on two theorems. The Heckscher-Ohlin theorem states that countries will export goods that intensively use their abundant and cheap factors, and import goods that intensively use their scarce and expensive factors. The factor price equalization theorem states that international trade will equalize factor prices between countries. The chapter outlines the assumptions of the theory and defines key terms like factor intensity and factor abundance. It also discusses empirical tests of the Heckscher-Ohlin model, such as the Leontief Paradox.

    Original Description:

    ssssssss

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The chapter discusses the Heckscher-Ohlin theory of international trade. The theory is based on two theorems. The Heckscher-Ohlin theorem states that countries will export goods that intensively use their abundant and cheap factors, and import goods that intensively use their scarce and expensive factors. The factor price equalization theorem states that international trade will equalize factor prices between countries. The chapter outlines the assumptions of the theory and defines key terms like factor intensity and factor abundance. It also discusses empirical tests of the Heckscher-Ohlin model, such as the Leontief Paradox.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    112 views19 pages

    Chapter 5

    Uploaded by

    Muhammed Embaby
    The chapter discusses the Heckscher-Ohlin theory of international trade. The theory is based on two theorems. The Heckscher-Ohlin theorem states that countries will export goods that intensively use their abundant and cheap factors, and import goods that intensively use their scarce and expensive factors. The factor price equalization theorem states that international trade will equalize factor prices between countries. The chapter outlines the assumptions of the theory and defines key terms like factor intensity and factor abundance. It also discusses empirical tests of the Heckscher-Ohlin model, such as the Leontief Paradox.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 19

    CHAPTER F I V E

    International
    Economics
    Tenth Edition

    Factor Endowments and the


    Heckscher-Ohlin Theory
    Dominick Salvatore
    John Wiley & Sons, Inc.

    In this chapter:
    Assumptions of the Theory

    Factor Intensity, Factor Abundance, and the

    Shape of the Production Frontier


    Factor Endowments and the Heckscher-Ohlin
    Theory
    Factor-Price Equalization and Income
    Distribution
    Empirical Tests of the Heckscher-Ohlin Model

    Assumptions of the Theory


    Heckscher-Ohlin theory based on following

    assumptions:
    1.

    2.

    3.

    Two nations (1 & 2) , two goods (X & Y), two


    factors of production (L & K)
    Technology is the same in both nations both
    nations have the same production function
    Commodity X is labor intensive, commodity Y is
    capital intensive in both nations.

    X requires relatively more labor (less capital) than Y.


    Capital-labor ratio is less in the production of X

    Assumptions of the Theory


    4.

    Constant returns to scale for X and Y in both


    nations.

    5.

    6.

    If a nation increases the amounts of L & K used in the


    production of X (or Y) by 10%, the output of X (or Y)
    increases by the same 10%.

    Incomplete specialization in production in both


    nations
    Tastes (preferences) are equal in both nations.

    If prices of X and Y are the same in both nations, both


    nations will consume X and Y in the same proportion.

    Assumptions of the Theory


    7.

    Both commodities and factors are traded in


    perfectly competitive markets

    8.

    All consumers and produces are price-takers


    In the long-run, prices of X & Y equal their cost of
    production (including implicit costs) Zero Economic
    Profit in LR.
    Commodities and factors are homogenous (identical) in each
    nation and internationally.

    Perfect factor mobility within each nation, but not


    between nations. That is, there is perfect internal,
    but no international, factor mobility.

    L & K freely move to the production of the commodity


    where earnings are higher

    Assumptions of the Theory


    9.

    10.

    No transportation costs, tariffs or other barriers to


    free trade.
    All resources are fully employed in both nations

    11.

    Each nation produces on its PPF.

    International trade between the nations is balanced.

    Total value of exports equals total value of imports for


    each nation.

    Factor Intensity, Factor Abundance, and the


    Shape of the Production Frontier
    Factor Intensity
    In a two-commodity, two-factor world,
    commodity Y is capital intensive if the capitallabor ratio (K/L) used in the production of Y is
    greater than K/L used in the production of X.

    It is not the absolute amount of capital and labor


    used in production of X and Y, but the amount of
    capital per unit of labor that determines capital
    intensity.

    Factor Intensity, Factor Abundance, and the


    Shape of the Production Frontier
    Factor Intensity
    Suppose that
    The production of 1X in nation 1 requires 1K & 4L
    The production of 1Y in nation 1 requires 2K & 2L
    The production of 1X in nation 2 requires 2K & 2L
    The production of 1Y in nation 2 requires 4K & 1L

    Therefore, X is labor-intensive and Y is capitalintensive in both nations.

    Factor Intensity, Factor Abundance, and the


    Shape of the Production Frontier
    Factor Abundance

    In terms of physical units:

    Nation 2 is capital abundant if the ratio of the


    total amount of capital to the total amount of
    labor (TK/TL) available in Nation 2 is greater than
    that in Nation 1.

    It is not the absolute amount of capital and labor


    available in each nation, but the ratio of the total
    amount of capital to the total amount of labor.

    Factor Intensity, Factor Abundance, and the


    Shape of the Production Frontier
    Factor Abundance
    In terms of relative factor prices:
    Nation 2 is capital abundant if the ratio of the
    rental price of capital to the price of labor time
    (PK/PL) is lower in Nation 2 than in Nation 1.

    Rental price of capital is usually considered to


    be the interest rate (r), while the price of labor
    time is the wage rate (w), so PK/PL = r/w.

    It is not the absolute level of r that determines


    whether a nation is K-abundant, but r/w.

    Nation 2 is K-abundant, and


    commodity Y is K-intensive

    Nation 1 is L-abundant, and


    commodity X is L-intensive

    FIGURE 5-2 The Shape of the Production Possibilities Frontiers


    (PPFs) of Nation 1 and Nation 2.

    Factor Endowments and the Heckscher-Ohlin


    Theory
    Heckscher-Ohlin (H-O) theory is based on

    two theorems:
    1. The H-O theorem

    A nation will export the commodity whose


    production requires the intensive use of the nations
    relatively abundant and cheap factor and import the
    commodity whose production requires the intensive
    use of the nations relatively scarce and expensive
    factor.

    Factor Endowments and the Heckscher-Ohlin


    Theory
    Heckscher-Ohlin (H-O) theory is based on two

    theorems:
    1. The H-O theorem

    In short, the relatively labor-abundant nation exports


    the relatively labor-intensive commodity and
    imports the relatively capital-intensive commodity
    Similarly, the relatively capital-abundant nation
    exports the relatively capital-intensive commodity
    and imports the relatively labor-intensive one
    H-O Theorem Explains comparative advantage
    rather than assuming it.

    Factor-Price Equalization and Income


    Distribution
    Heckscher-Ohlin (H-O) theory is based on

    two theorems:
    2. The factor price equalization theorem

    International trade will bring about equalization in


    the relative and absolute returns to homogenous
    factors across nations.
    In short, wages and other factor returns will be
    the same after specialization and trade has
    occurred.
    Holds only if H-O theorem holds.

    Factor-Price Equalization and Income


    Distribution
    Heckscher-Ohlin (H-O) theory is based on

    two theorems:
    2. The factor price equalization theorem

    International trade causes w to rise in Nation 1


    (the low-wage nation) and fall in Nation 2. (the
    high-wage nation), reducing the pre-trade
    difference in w between nations.
    Similarly, trade causes r to fall in Nation 1 (the
    K-expensive nation) and rise in Nation 2. (the Kcheap nation), reducing the pre-trade difference
    in r between nations.

    Factor-Price Equalization and Income


    Distribution
    Heckscher-Ohlin (H-O) theory is based on

    two theorems:
    2. The factor price equalization theorem

    Thus, international trade causes a


    redistribution of income from the relatively
    expensive (scarce) factor to the relatively cheap
    (abundant) factor.

    FIGURE 5-5 Relative FactorPrice Equalization.

    Empirical Tests of the Heckscher-Ohlin Model


    The Leontief Paradox

    A 1951 test of the H-O theory

    Showed that the pattern of trade did not fit the


    conclusions of the H-O theorem.

    Exports in the U.S. seemed to be labor intensive


    when they should have been capital intensive.

    Empirical Tests of the Heckscher-Ohlin Model


    Source of the Leontief Paradox Bias

    Assumed a two factor world which required


    assumptions about what is capital and what is
    labor.
    Most heavily protected industries in U.S. were
    L- intensive, reduced imports and increased
    domestic production of L-intensive goods.
    Only physical capital included as capital,
    ignoring human capital (education, job training,
    skills).

    You might also like