Heckscher Ohlin trade model

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Heckscher-Ohlin Theory of Trade
A country will export products that use
relatively intensively those production factors
found relatively abundantly in the country,
and import products that use relatively
intensively those production factors that are
relatively scarce in the country.
H-O comparative advantage is actually a triple
comparison:
-across countries
-across products
-across factors of production

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Heckscher-Ohlin Theory of Trade
2 factors of production, 2 goods and 2
countries model
Differences in factor endowments determines
trade.
Capital rich countries will export capital
intensive products.
Labor rich countries will export labor intensive
products.
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assumptions
1. No transport costs.
2. Perfect competition in commodity and factor
markets.
3. Production function homogeneous of first
degree.
4. Production function such that the two
commodities show different factor intensities.
5. Production functions differ between
commodities but are the same in both the
countries.
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Factor abundance and intensity
A country is relatively labor abundant if it has
a higher ratio of labor to other factors than
does the rest of the world.
A product is relatively labor intensive if labor
costs are a greater share of its value than they
are of the value of other products.
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How Free Trade Affects Income
Distribution in the Long Run
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Winners and Losers: Short Run Versus
Long Run
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International Factor Price Equalization
With the shift to free trade: For each factor, its rate of
return becomes more similar between countries.
Under ideal conditions, its real rate of return is the
same in different countries.
Example: Labor.
With no trade, the wage rate is high in the labor-scarce
country. The wage rate is low in the labor-abundant
country.
With free trade, the import of labor-intensive products
pushes the wage-rate down in the labor-scarce
country. The export of labor-intensive products pulls
the wage rate up in the labor-abundant country.

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Shares of the Worlds Factor
Endowments, Early 2000s
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U.S. International Trade in Selected
Products, 2004
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Empirical test
Leontief Paradox 1951
Results showed Us to be exporting labor
intensive products.
Explanation of the paradox natural
resources, skilled labor, different kinds of
capital.
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