Heckscher-Ohlin model - PowerPoint PPT Presentation

1 / 20
About This Presentation
Title:

Heckscher-Ohlin model

Description:

Differences in relative resource endowments cause differences in relative prices ... Car production is capital intensive = (K/L)c. Shoe production is labour ... – PowerPoint PPT presentation

Number of Views:297
Avg rating:3.0/5.0
Slides: 21
Provided by: commerc
Category:
Tags: heckscher | model | ohlin

less

Transcript and Presenter's Notes

Title: Heckscher-Ohlin model


1
Heckscher-Ohlin model
  • Eco 3024F
  • Readings
  • Ch5 Factor endowments and HO theory. Salvatore,
    D. (in reader)

2
Reasons for Trade
  • Why are countries different?
  • Production (supply)
  • 1) Technology (production functions) (RICARDO),
  • 2) factor endowments (Land, Labour, Capital)
  • 3) returns to scale
  • 4) competitive conditions,
  • 5) governments taxes subsidies
  • Consumption (Demand)
  • Community indifference Curve (CIC) (tastes
    preferences)
  • Any difference in production will lead to
    different price ratios in closed economnies.
    Different relative prices result in trade.

3
GE framework of HO model in closed economy
Commodity prices
4
Ricardo model
  • Why are countries different?
  • Different Technology ? different relative prices
  • What are the limitations of model?
  • Model assumes full specialization
  • What are the sources of labour productivity?
    Capital?
  • Income distribution Model predicts that all
    factors gain
  • Cannot explain intra-industry trade
  • What about other factors of production?

5
Heckscher-Ohlin
  • Why are countries different?
  • 2) Different factor endowments
  • SA exports resource intensive products (iron
    steel, gold, uranium) because of its resource
    endowments, not because of differences in
    relative labour productivity

6
The composition of regional trade
  • Why does the composition of Zim-US trade with
    each other differ?

7
Resource (factor) endowments
  • Capital and labour endowments
  • Country capital stock (b) labour force(m) K/L
  • India 482 254 1,9
  • Brazil 507 53 9,5
  • Mexico 353 23 15,3
  • US 3 696 116 32,4
  • Germany 1 018 26 39,1
  • Switzerland 120 3 40

8
Resource (factor) intensities
  • Capital and labour ratios in selected U.S.
    industries
  • Industry capital (b) labour (m) K/L(th)
  • Petroleum 27 .09 284
  • Iron Steel 25 .505 50
  • Footwear .514 .107 4.8
  • Clothing 3.4 .978 3.5

9
Where are we going?
  • What will we show?
  • Trade patterns determined by the countrys
    relative abundance of resources (factors) and the
    relative intensity in which these resources
    (factors) are used in production
  • How will we show it?
  • Differences in relative resource endowments cause
    differences in relative prices

10
Assumptions of H-O
  • HO only works if we make the following
    assumptions
  • 2 nations (US SA), 2 goods (Shoes Cars) and 2
    factors (capital K labour L)
  • Factors immobile internationally, perfectly
    mobile nationally
  • Same production technology in both countries
  • Constant returns to scale
  • Identical preferences
  • Perfect competition in all markets
  • Zero transport costs or trade barriers, full
    utilization of resources in both countries trade
    balance is zero

11
H-O model
  • Assume
  • Car production is capital intensive (K/L)c
  • Shoe production is labour intensive (K/L)Sh
  • (K/L)c gt (K/L)Sh
  • kc gt kSh
  • 2) US is capital abundant
  • SA is labour abundant
  • (Kstock/Lstock)US gt (Kstock/Lstock)SA

12
Producer Optimization (GE)
Perfect competition and mobile factors implyw/r
is same for shoe and car industry
Producer equilibriumMRTSC MPLC/MPKC w/r
MRTSS MPLS/MPKS
100 cars
K
a
b
500 shoes
L
13
Producer Optimization (GE)
What happens to K/L ratios if w/r rose?
Answer Production of Car and Shoes at higher K/L
ratios. Why? But (K/L)c still greater than
(K/L)Sh .
100 cars
K
a
b
500 shoes
L
14
SA US PPF
  • US is capital abundant Hence PPF is biased
    towards capital-intensive good (Cars)

SA is labour abundant Hence PPF is biased
towards labour-intensive good (Shoes)
Cars
Cars
SA
US
100
80
Shoes
500
400
15
SA US PPF
  • General equilibrium Psh/Pc such that production
    matches consumption gt tangent of Consumer
    indifference curve (CIC) and PPF

SA
US
Cars
Cars
100
80
Shoes
500
400
16
Free Trade
  • Differences in relative prices -gt trade
  • (Psh/Pc)SA lt (Psh/Pc)US
  • i.e. Shoes are relative cheap in SA, cars are
    relatively cheap in US
  • World price settles
  • (Psh/Pc)SA ? Pw ? (Psh/Pc)US
  • Trade flows
  • US exports Cars, SA exports shoes.

17
SA US PPF
World price settles (Psh/Pc)SA ? Pw ? (Psh/Pc)US
SA
US
Cars
Cars
100
80
Eus
(Psh/Pc)SA
(Psh/Pc)US
Shoes
500
400
18
Size does not matter for direction of trade
cars
Pus
US
B
PWorld
shoes
19
Heckscher-Ohlin Theorem
  • A country will export the good which intensively
    uses its relatively abundant factor
  • US Capital abundant Cars capital intensive
  • US exports cars
  • SA Labour abundant Shoes Lab intensive
  • SA exports Shoes
  • NOTE Both countries still produce both goods

20
Empirical evidence
Write a Comment
User Comments (0)
About PowerShow.com