Trade and Resources
The Heckscher-Ohlin model
Dr. Petre Badulescu
Introduction
This lecture outlines the Heckscher-Ohlin model, a model
that assumes that trade occurs because countries have
different resources.
Our first goal is to describe the Heckscher-Ohlin (HO) model
of trade.
• The specific-factors model that we studied in the
previous lecture was a short-run model because capital
and land could not move between the industries.
• In contrast, the HO model is a long-run model because
all factors of production can move between the
industries.
Dr. Petre Badulescu
Lecture 4, International economics
2
Introduction
Our second goal is to examine the empirical evidence on the
Heckscher-Ohlin model.
• By allowing for more than two factors of production and
also allowing countries to differ in their technologies, as
in the Ricardo model, the predictions from the
Heckscher-Ohlin model match more closely the trade
patterns in the world economy today.
The third goal of the lecture is to investigate how the
opening of trade between the two countries affects the
payments to labor and to capital in each of them.
Dr. Petre Badulescu
Lecture 4, International economics
3
The Heckscher-Ohlin Model
Assumptions
Assumption 1: Two factors of production, labor (L) and
capital (K), can move freely between the industries.
Assumption 2: Shoe production is labor-intensive; that is, it
requires more labor per unit of capital to produce shoes
than computers, so that
LS /KS > LC /KC.
Dr. Petre Badulescu
Lecture 4, International economics
4
The Heckscher-Ohlin Model
Assumptions
Labor Intensity of Each Industry The demand for labor relative to
capital is assumed to be higher in shoes than in computers,
LS/KS > LC/KC.
FIGURE 4-1
These two curves slope
down just like regular
demand curves, but in this
case, they are relative
demand curves for labor
(i.e., demand for labor
divided by demand for
capital).
0
Dr. Petre Badulescu
Lecture 4, International economics
5
The Heckscher-Ohlin Model
Assumptions
Assumption 3: Foreign is labor-abundant, by which we
mean that the labor–capital ratio in Foreign exceeds that in
Home,
L*/K*> L/K.
Equivalently, Home is capital-abundant, so that K/L >K*/L*.
Assumption 4: The final outputs, shoes and computers,
can be traded freely (i.e., without any restrictions)
between nations, but labor and capital do not move
between countries.
Dr. Petre Badulescu
Lecture 4, International economics
6
The Heckscher-Ohlin Model
Assumptions
Assumption 5: The technologies used to produce the two
goods are identical across the countries.
Assumption 6: Consumer tastes are the same across
countries, and preferences for computers and shoes do not
vary with a country’s level of income.
Dr. Petre Badulescu
Lecture 4, International economics
7
APPLICATION
Are Factor Intensities the Same across Countries?
While much of the footwear in the world is produced in
developing nations, the United States retains a small
number of shoe factories.
In India, the sewing machine used to produce footwear is
cheaper than the computer used in a call center. Footwear
production in India is labor-intensive as compared with the
call center, which is the opposite of what holds in the
United States.
This example illustrates a reversal of factor intensities
between the two countries.
In the United States, agriculture is capital-intensive. In many
developing countries, it is labor-intensive. ■
Dr. Petre Badulescu
Lecture 4, International economics
8
The Heckscher-Ohlin Model
No-trade equilibrium
FIGURE 4-2 (1 of 3)
No-Trade Equilibria in Home and Foreign
0
0
The Home production possibilities
frontier (PPF) is shown in panel (a),
and the Foreign PPF is shown in panel
(b).
Dr. Petre Badulescu
PPF:s, Indifference Curves, and
No-Trade Equilibrium Price
Because Home is capital abundant
and
computers
are
capital
intensive, the Home PPF is
skewed toward computers.
Lecture 4, International economics
9
The Heckscher-Ohlin Model
No-trade equilibrium
FIGURE 4-2 (2 of 3)
0
PPF:s, Indifference Curves, and
No-Trade Equilibrium Price
No-Trade Equilibria in Home and Foreign (continued)
0
Home
preferences
are
The
The slope
Home
of
no-trade
an indifference
(orsummarized
autarky)curve
equilibrium
The is
slope
at the
of tangency
the PPF point
equals
A, the
by
the indifference
U.
equals
where
the
theamount
relativecurve,
that
price
consumers
that consumers
are opportunity
are willing tocost
payofforproducing
one moreone
willing
computer
to pay
equals
for computers
the opportunity
in terms
cost
of of producing
more computer
it.
in terms of shoes
shoes
rather
than
dollars.a low relative price
given
up.
The flat
slope
indicates
of computers,
(PC /PS)A.
Dr. Petre Badulescu
Lecture 4, International economics
10
The Heckscher-Ohlin Model
No-trade equilibrium
FIGURE 4-2 (3 of 3)
PPF:s, Indifference Curves, and
No-Trade Equilibrium Price
No-Trade Equilibria in Home and Foreign (continued)
Q *S 1
0
0
A*
Q *C1
Foreign preferences
is labor-abundant
and shoesby the indifference curve, U*
summarized
The result from are
comparing
the no-trade equilibria for these two
are
laborintensive,
so
the
Foreign
Thecountries
Foreign no-trade
is at theprice
tangency
point A*,at with
a higher
is that theequilibrium
no-trade relative
of computers
Home
is
PPF
is
skewed
toward
shoes.
relative
lowerprice
thanofincomputers,
Foreign. as indicated by the steeper slope of (P*C /P*S)A*.
Dr. Petre Badulescu
Lecture 4, International economics
11
The Heckscher-Ohlin Model
Free-trade equilibrium
We are now in a position to determine the pattern of trade
between the two countries. We proceed in several steps.
First, we consider what happens when the world relative
price of computers is above the no-trade relative price of
computers at Home, and trace out the Home export supply
of computers.
Second, we consider what happens when the world relative
price is below the no-trade relative price of computers in
Foreign, and trace out the Foreign import demand for
computers.
Finally, we put together the Home export supply (Sx) and the
Foreign import demand (Dm) to determine the equilibrium
relative market price of computers with international trade.
Ch 041.pptx
Dr. Petre Badulescu
Lecture 4, International economics
12