CH04 Resources and TradeThe Heckscher-Ohlin Model.ppt

Chapter 4
Resources and Trade:The Heckscher-Ohlin Model
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Introduction
A Model of a Two-Factor Economy
Effects of International Trade Between Two-Factor Economies
Empirical Evidence on the Heckscher-Ohlin Model
Summary
Appendix: Factor Prices, Goods Prices, and Input Choices
anization
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Introduction
In the real world, while trade is partly explained by differences in labor productivity, it also reflects differences in countries’ resources.
The Heckscher-Ohlin theory:
Emphasizes resource differences as the only source of trade
Shows parative advantage is influenced by:
Relative factor abundance (refers to countries)
Relative factor intensity (refers to goods)
Is also referred to as the factor-proportions theory
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Assumptions of the Model
An economy can produce two goods, cloth and food.
The production of these goods requires two inputs that are in limited supply; labor (L) and land (T).
Production of food is land-intensive and production of cloth is labor-intensive in both countries.
petition prevails in all markets.
A Model of a Two-Factor Economy
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//
binations
that produce one
calorie of food
Unit land input aTF ,
in acres per calorie
Unit land input aLF ,
in hours per calorie
A Model of a Two-Factor Economy
Figure 4-1: Input Possibilities in Food Production
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Factor Intensity
In a world of two goods (cloth and food) and two factors (labor and land), food production is land-intensive, if at any given wage-rental ratio the land-labor ratio used in the production of food is greater than that used in the production of cloth:
TF/LF > TC/ LC
Example: If food production uses 80 workers and 200 acres, while cloth production uses 20 workers and 20 acres, then food production is land-intensive and cloth production is labor-intensive.
A Model of a Two-Factor Economy
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CC
FF
Wage-rental
ratio, w/r
Land-labor
ratio, T/L
A Model of a Two-Factor Economy
Figure 4-2: Factor Prices and Input Choices
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Factor Prices and Goods Prices
Stolper-Samuelso