The Heckscher-Ohlin-Samuelson Theorem

1
The Heckscher-Ohlin-Samuelson Theorem

• ECN 3891
• International Economics - Honors
• Dr. Ali Moshtagh

2
The Classical and Neo-Classical Models of
International Trade

• The Classical model of international trade is
  based on the Labor Theory of Value it assumes
  only one factor of production, identical
  technology between the two countries, identical
  tastes, etc.. The model promotes specialization
  and requires complete specialization for at least
  one country, due to constant opportunity costs.
• Given a concave production possibilities
  frontier, international trade should lead to
  incomplete specialization, due to increasing
  costs.
• The Neo-Classical models of international trade
  assume more than one factor of production. The
  Heckscher-Ohlin-Samuelson model (also known as
  the Factor Endowment or the Variable Proportion
  Model) not only describes the pattern of trade,
  but it also predicts the impact of trade on the
  national income and returns to the factors of
  production.

3
Other Assumptions

• two countries, two factors, two products
• perfect competition in all markets
• Free trade
• Factors of production are available in fixed
  amounts in each country
• Full mobility of factors of production between
  industries within each country
• Immobility of factors of production between
  countries
• The two countries are alike with respect to
  tastes
• Technology is available to both countries and
• Linear homogeneous production functions of degree
  one (constant returns to scale).

4
The Heckscher-Ohlin Theorem

• Critical Assumptions
• Countries are characterized by different factor
  endowments--a country is capital abundant if it
  has a higher ratio of capital to other factors
  than does its trading partner
• There are different factor intensities between
  products--a product is capital-intensive if, at
  identical wages and rents, its production
  requires more capital per worker than does the
  other product.

5
The H-O Theorem

• Given identical production functions but
  different factor endowments between countries, a
  country will tend to export the commodity which
  is relatively intensive in her relatively
  abundant factor
• In general, countries tend to have comparative
  advantage in the products that are relatively
  intensive in their relatively abundant factors

6
The Stolper-Samuelson Theorem

• Assumptions
• One country produces two goods (wheat and cloth)
  with two factors of production (capital and
  labor)
• neither good is an input into the production of
  the other
• competition prevails
• factor supplies are given
• both factors are fully employed
• both factors are mobile between sectors (but not
  between countries)
• one good (wheat) is capital-intensive and the
  other (cloth) is labor-intensive)
• opening trade raises the relative price of the
  export good.

7
The Stolper-Samuelson Theorem

• moving from no trade to free trade raises the
  returns to the factor used intensively in the
  rising-price industry, and lowers the returns to
  the factor used intensively in the falling-price
  industry, regardless of which goods the sellers
  of the two factors prefer to consume

8
The Factor Price Equalization Theorem

• Assumptions
• there are two countries using two factors of
  production producing two products
• competition prevails in all markets
• each factor supply is fixed, and there is no
  migration between countries
• each factor is fully employed in each country
  with or without trade
• there are no transportation or information costs
• free trade
• production functions exhibit constant returns to
  scale, and are the same between countries for any
  industry
• production functions are not subject to factor
  intensity reversals and
• both countries produce both products with or
  without trade.

9
The Factor Price Equalization Theorem

• Free trade will equalize not only commodity
  prices but also factor prices, so that all
  workers earn the same wage rate and all units of
  capital will earn the same rental return in both
  countries regardless of the factor supplies or
  the demand patterns in the two countries

10
Hourly Pay in Manufacturing
11
The Leontief Paradox

• In 1953 Wassily Leontief published the results
  of the most famous empirical investigations in
  economics, an attempt to test the consistency of
  the H-O Model with the U.S. trade patterns.
• Leontiefs objectives were to prove that
• the H-O Model was correct and
• to show that the U.S. exports were capital
  intensive

12
The Leontief Paradox

• Leontief developed a 1947 input-output table for
  the U.S. to determine the capital-labor ratios
  used in the production of U.S. exports and
  imports. Leontief found that the U.S. exports
  used a capital-labor ratio of 13,991 per man
  year, whereas import substitutes used a ratio of
  18,184 per man year.

13
The Leontief Paradox

• The key ratio of ( KX / LX ) / ( KM / LM )
• (13,991 / 1) / (18,184 / 1) 0.77
• was calculated. Given the presumption that the
  U.S. was relatively capital abundant, that ratio
  was just the reverse of what the H-O Model
  predicted. Thus, it is called the Leontief
  Paradox.

14
International Factor Mobility

• In Home and Foreign there are two factors of
  production, land and labor, used to produce only
  one good. The land supply in each country and
  the technology of production are exactly the
  same. The marginal product of labor in each
  country depends on employment as shown in the
  Table. Initially, there are 11 workers employed
  in Home, but only 3 in Foreign. Find the effects
  of free movement of labor from Home to Foreign on
  employment, production, real wages, and the
  income of land owners in each country.

Production Function
15
Pre International Factor Mobility

• Home
• Employment 11
• Production 165
• Real Wage Rate 10
• Real Wages 110
• Real Rent 55

Production Function
16
Pre International Factor Mobility

• Foreign
• Employment 3
• Production 57
• Real Wage Rate 18
• Real Wages 54
• Real Rent 3

Production Function
17
Post International Factor Mobility

• Home
• Employment 7
• Production 119
• Real Wage Rate 14
• Real Wages 98
• Real Rent 21

• Foreign
• Employment 7
• Production 119
• Real Wage Rate 14
• Real Wages 98
• Real Rent 21

18
Effects of International Factor Mobility

• Home
• Employment 11
• Production 165
• Real Wage Rate 10
• Real Wages 110
• Real Rent 55

• Home
• Employment 7
• Production 119
• Real Wage Rate 14
• Real Wages 98
• Real Rent 21

19
Effects of International Factor Mobility

• Foreign
• Employment 3
• Production 57
• Real Wage Rate 18
• Real Wages 54
• Real Rent 3

• Foreign
• Employment 7
• Production 119
• Real Wage Rate 14
• Real Wages 98
• Real Rent 21