Dr' Bill W' S' Hung

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HKBU-ECON3110 International Economics Lecture
Overheads (02)
Heckscher-Ohlin Trade Theory
Dr. Bill W. S. Hung
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Neoclassical Trade Theory The Heckscher-Ohlin
Theorem
Basic Assumptions
1. Two countries, two goods, two factors -- 2x2x2
mode
2. Identical technological in two countries
Production functions are same in two countries
3. Constant returns to scale The sharp of
PPC is unchanged
4. Two different factor abundance countries
Labor-abundant and capital-abundant And Two
factor intensities commodities
Labor-intensive and Capital-intensive
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5. Identical preference and tastes Two
countries are facing the same utility functions
6. Perfect competition Goods market and
factors market
7. Factors are perfectly mobile only within a
country Factors are restricted to move across
countries
8. No transportation costs
9. No restriction on trade
10. Increasing opportunity costs The PPF
curve is concave but not a straight line.
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Suppose Country 1 is relatively capital
abundant Country 2 is relatively labor abundant
Factor abundance
Definition
Since Country 1 has relative abundance of
capital, thus its rental rate of capital is
relatively lower than the wage.
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Relative Factor Intensity
Commodity S (steel) is a capital-intensive goods.
  Commodity C( clothes) is a labor-intensive
goods.
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The Edgeworth Box
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Country I Labor-abundant country
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Country II Capital abundant country
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Autarky Equilibrium
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Combining two countries input space, output space
and consumer preference
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The different prices in autarky indicate that
there is a basis for gainful trade between two
countries.
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Trade direction, incomplete specialization, and
consumption
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The Heckscher-Ohlin Theorem
A country will have comparative advantage in, and
therefore, will export, that good whose
production is relatively intensive in the factor
with which that country is relatively well
endowed.
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(A) Trade between two countries with Identical
Demand Different Production Structures
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(B) Trade between two countries with Identical
PPFs Different Demand Conditions
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(C) No Trade between two countries with Identical
PPFs identical Demand Conditions
Community Indifferent curves
A
E
CI2
CI1
CI0
B
PX PY
(autarky price)
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Gains From Trade
3 important assumptions  1. No costs of factor
mobility 2. Full employment of factors 3. No
redistribution of income once trade open
(the different curve can show welfare
changes)
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Gains from trade and specialization
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The Leontief Paradox
Leontief statistic is defined as
Leontiefs result were startling. He found that
the hypothesized reduction of US export would
release 2.25 Million worth of capital And 182.3
year of labor-time, for a (K/X)x of approximately
14,000 Per labor-year. On the import side, to
produce the foregone import would require 3.09
million worth of capital and 170,0 years
of Labor-time, yielding a (K/L)M of approximately
18,200 per labor-year. Thus, the Leontief
statistic for the US was 1.3 ( 18,200/14,000),
Unexpected for a relatively capital-abundant
country.
What are the implications of the Leontief Paradox?
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Invalid assumptions to Heckscher-Ohlin Model
1. Demand reversal
2. Factor-intensity reversal
3. Transportation costs
4. Imperfect competition
5. Immobile or commodity-specific factors
6. US tariff structure
7. Different skill levels of labor
others
8. The role of natural resources
9. Income inequality