International economics 20082009

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International economics2008/2009

• Lecture 4 Neoclassical trade theory

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Heckscher-Ohlin-Samuelson model

• Trade can and up hurting large interest groups
  within any country (e.g. owners of labor, owners
  of capital, owners of land,...)
• HOS theory provides a basis for the analysis of
  the effects of trade on different parts of the
  population

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Heckscher-Ohlin-Samuelson model

• The HOS theory predicts that the country exports
  products that use their abundant factors
  intensively and imports products that use their
  scarce factors intensively
• A country is relatively labor-abundant if it has
  a higher ratio of labor to other factors than
  does the rest of the world

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Heckscher-Ohlin-Samuelson model

• A country is relatively capital-abundant if it
  has a higher ratio of capital to other factors
  than does the rest of the world

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Heckscher-Ohlin-Samuelson model

• The reason that the production costs for certain
  goods are lower in one region than in another is
  the difference in the relative scarcity of
  factors of production. Exports will then mainly
  consist of goods where the abundant factors of
  production are used in large quantities and the
  other factors in small quantities only, while
  imports consist of the types of goods requiring
  large quantities of the latter factors of
  production and factors of production not
  available in the region at all. (Ohlin 1999,
  14-15).

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Heckscher-Ohlin-Samuelson model

• Evolution of the model
• E. Heckscher (1919) a statement that relative
  scarcity of production factors is a necessary
  condition for comparative cost differential and
  trade
• B. Ohlin (1933) goods can be produced with
  different factor intensity, hence, due to
  internationally different factor prices each
  country specializes in good that requires a
  larger employment of relative abundant factor
• P. Samuelson (1948, 1949) formulates both
  statement into a rigorous model HOS theorem
• J. Vanek (1968) factor-content version of HOS
  theorem each country is a net exporter of factor
  services of its more abundant factor and a net
  importer of factor services of its more scarce
  factor
• Stolper-Samuelson (1941) Stolper Samuelson
  theorem
• Rybczynski (1955) Rybczynski theorem

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Heckscher-Ohlin-Samuelson model

• 4 MAJOR THEOREMS
• Heckscher-Ohlin (HO) theorem
• Factor-price-equalization theorem (FPE theorem)
• Stolper-Samuelson (SS) theorem
• Rybczynski (R) theorem

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Four theorems of HOS

• HO THEOREM
• Given relative goods prices, a country
  specializes in production of good in which its
  more abundant factor is used more intensively
• FACTOR-CONTENT VERSION OF HO THEOREM
• Each country is a net exporter of factor services
  of its more abundant factor and a net importer of
  factor services of its more scarce factor

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Four theorems of HOS

• FPE THEOREM
• International trade in goods leads to - relative
  and absolute - equalization of international
  factor prices
• STOLPER-SAMUELSON THEOREM
• An increase in price of one good increases
  nominal, relative and real rewards to factor that
  is used more intesively in production of that
  good and reduces the nominal, relative and real
  rewards to the other factor

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Four theorems of HOS

• RYBCZYNSKI THEOREM
• Given different factor intensities and constant
  product prices, an increase in supply of one
  factor increases production of the good where
  this factor is used more intensively and
  decreases the production of the other good

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Assumptions of the model

• 2x2x2 model 2 PF (labor and capital), 2 goods in
  2 countries
• perfect competition in goods and factor markets
• identical technology, i.e. identical production
  functions, such that it holds
• linear homogeneity (constant returns)
• positive but decreasing marginal factor returns
• no factor intensity reversals

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Assumptions of the model

• factors are perfectly mobile within a country but
  immobile internationally
• goods in trade are identical irrespective the
  country of origin
• homothetic and internationally identical consumer
  preferences
• two countries differ only in terms of relative
  endowments of factors of production (strict HOS)
  but also differences in consumer preferences can
  be allowed for (broad neoclassic theory)

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HOS implications

• Trade arises due to different relative factor
  abundances in both countries and different factor
  intensities in the use of those factors in
  production
• HOS predicts thatr opening up to trade will
  expand the exporting sector and contract the
  import-competing sector sector

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HOS implications

• short-run effects from trade
• factors of production are not mobile (or are less
  mobile)
• returns to those factors increase in the
  exporting sectors and
• decrease in the import-competing sectors

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HOS implications

• Long-run effects from trade
• Factors move in response to differences in
  returns between sectors
• Factor movement changes the ratio of factor
  returns but not back to their pre-trade levels
• There is namely an inherent imbalance in the
  changes in factor demand between the sectors

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HOS implications

• Long-run effects from trade
• The labor-intensive sector will demand/supply
  relatively high share of labor and supply/demand
  a relatively low share of other factors
• The capital-intensive sector will supply/demand
  relatively high share of capital and
  demand/supply a relatively low share of other
  factors

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HOS implications

• Long-run effects from trade
• Factor prices will have to adjust in order to
  compensate for the difference in intensities
• The price of the relatively abundant factor will
  increase, while the price of the relatively
  scarce factor will decrease

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HOS implications

• In the long run both sectors will experience
  similar changes of factor prices
• In the short run, the changes in factor prices
  will depend on the sector in question
  (expanding-exporting sector or contracting
  importing sector)