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Chapter IV neo-classical model of international trade theory: Heckscher - Ohlin Model

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Title: Chapter IV neo-classical model of international trade theory: Heckscher - Ohlin Model


1
Chapter IV neo-classical model of international
trade theory Heckscher - Ohlin Model
  • ????????

2
Section 1 Heckscher and Ohlin's main contribution
to their trade ideas
  • In the neo-classical international trade theory,
    the contribution is most critical to Heckscher
    and Ohlin.
  • By Adam Smith and David Ricardo, represented by
    the classical economists point to the labor
    theory of value based on demonstrated national
    differences in labor productivity, thus built up
    a theory of comparative advantage.

3
  • Heckscher and Ohlin's contribution is to
    establish a Heckscher - Ohlin model (ie H-O
    model) extends the model of comparative
    advantage.
  • Firstly, differences in factor endowments
    explains the basis of international trade.

4
  • Secondly, Adam Smith and David Ricardo's
    international trade theory was questioned.
  • After 1890, Marshall's equilibrium price theory
    has replaced the labor theory of value as the
    basis of Western economics, but the labor theory
    of value is still the dominant theory of
    international trade.

5
  • Ohlin factor endowment theory of production is to
    meet this "reform" of the need to put forward.
  • Ohlin put the Ricardo's comparative cost
    integrated the theory of John Stuart Mill's
    theory of mutual needs, Marshall's equilibrium
    price theory and the theory of comparative costs
    of Taussig, based on his teacher Heckschers
    (1879 1952) encouragement he created the
    production factor endowment theory, it is also
    known as Heckscher - Ohlin theorem. Ohlin
    therefore won the Nobel Prize in Economics in
    1977.

6
  • In the H-O Model, Ohlin thought that the first
    condition of trade is the price differences
    between regions. This price difference from the
    demand perspective, the desire by consumers and
    the ownership of factors of production (which
    affect the consumer's income) to decide from the
    supply perspective, from all over the size of the
    production factors of production.

7
  • In many places the same preference for the
    consumption of goods, demand conditions remain
    unchanged and the same level throughout the
    production technology, under the assumption of
    constant returns to scale ,Ohlin thought that
    'sufficient' condition of the regional trade is
    the unequal endowment of factors of production.

8
  • Since each region contains a large proportion of
    exports is relatively abundant and inexpensive
    elements, and thus these elements have become a
    scarce than before. While imports contains a high
    proportion of scarce elements, and thus these
    elements become less scarce over. Therefore, the
    consequences of regional trade is to make
    commodity price equalization, the prices of
    factors of production are also the trend towards
    equalization.

9
  • Factor endowment theory has opened up the
    beginning of modern international trade theory,
    and later on the theory of factor endowments a
    lot of economists developed and validated
    .Fanally, the Leontief paradox and Rindel demand
    similarity theory appeared.

10
Section 2 Heckscher - Ohlin factor endowment
trade model
  • 1, H-O model assumptions2, factor intensity and
    factor abundance3, H-O model analysis4, For the
    analysis of theoretical significance for H-O model

11
I?H-O model assumptions
  • there are 11 assumptions about H-O model, the
    most important are the following six, when we
    gradually relax these assumptions, we will get
    different conclusions.

12
  • 1, the two countries, two products, two factors
    of production.2, factors of production in the
    world countries are homogeneous and, in all
    countries the supply of factors of production is
    fixed .But in the domestic inter-industry flows
    can be.

13
  • 3, on the assumption that the production function
    has three aspects
  • Production function is linear, and for the
    constant returns to scale the marginal
    productivity of factors of production is
    positive, but decreasing.

14
  • The same production between countries has the
    same function, there is no technology gap.
  • There is no factor intensity reversal ,that is,
    different products were produced with different
    elements of production, elements of the same
    product portfolio is always the same.

15
  • 4, the demand pattern of two kinds of product
    between two countries is the same and the ratio
    depends on the prices of various commodities
    consumption rather than income, that income level
    and preferences do not determine the type of
    trade (pattern of trade).

16
  • 5, there is not fully professional division of
    labor, assuming that under the free trade between
    the two countries produce two products.
  • 6, there is no transport costs and trade
    barriers, commodity and factor markets are
    perfectly competitive.

17
II? factor endowments and relative supply
  • (A) factor intensity and factor abundance
  • Factor intensity refers to the production of one
    unit of a product used a combination of factors
    of production ratio. Under the circumstances of
    two kinds of capital and labor factors of
    production, the intensity factor of production
    refers to a unit of the product used in the
    capital - labor ratio.

18
  • Factor intensity is a relative concept, even if
    the production of two kinds of products, the
    number of different elements of the various
    inputs, but as long as the input to the relative
    ratio of the various elements of the same, then
    this factor intensity of both products is the
    same.

19
  • Elements of the two products and the proportion
    of the relationship between factor prices can be
    comparable, corresponding to a certain price
    level, the relative factor intensity also can
    determine.

20
  • Suppose X and Y two kinds of commodities in the
    production process required for the proportion of
    factor inputs (capital / labor) were KX / LX and
    the KY / LY. If the KY / LYgt KX / LX, claimed
    that Y is capital-intensive products, X is
    labor-intensive products.

21
  • Factor abundance is a measure of a country owned
    by the relative abundance of economic resources,
    or resources of a country relative supply.

22
  • There are two methods of the definition of
    abundance. One is based on the definition of
    physical units, and the other is based on the
    definition of relative factor prices.

23
  • The first method If the country B the total
    capital available and the availability of the
    ratio of total labor force (TK / TL) is greater
    than the proportion of A in this country, we say
    B is a capital abundant country. Note that this
    method using a total capital and the ratio of
    total labor force, rather than the absolute
    number of both. If the B State TK / TL is greater
    than A country's TK / TL, even if country B's
    capital has a less than A country, B is still the
    capital abundant country.

24
  • The second method If the country B the price of
    capital and labor time, the ratio of prices of
    the country this ratio is less than A, we say B
    is a capital abundant country. Similarly, should
    pay attention to decide whether a country is
    capital abundant, not to see the price of capital
    (eg, r) the absolute level, but to see it with
    the price of labor (eg w) ratio of r / w size.
    For example, B States, r may be higher than the
    country A, but if the country B r / w is less
    than A State r / w, then B is the capital
    abundant country.

25
  • (B) differences in factor endowments and relative
    differences between the supply Abundant factor
    will affect the production possibilities curve
    shape. As shown below

26
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27
  • If the labor abundant country A and X as a
    labor-intensive products, B and Y-abundant
    countries to capital-intensive products, then, A
    State AA production possibilities curve will be
    relatively biased towards X-axis, B-country
    production possibilities curve will be relatively
    biased towards BB Y-axis.

28
III?H-O model analysis
  • (A) general equilibrium analysisThe use of
    analytical tools production possibility curve
    and the social indifference curve.
  • Compared with the classical trade model, HO model
    is the assumption that a country's production
    possibilities there are two differences

29
  • Firstly, on the production of various commodities
    between the two countries the ability for
    different reasons. The classical trade model to
    explain the different technologies for the
    production, while the H-O model emphasizes
    different elements of the endowment.

30
  • Secondly, on the assumption that the opportunity
    cost of production. The classical trade model
    assumes that labor is the only inputs, labor
    input per unit of output remains unchanged.
    Therefore, the opportunity cost per unit is
    fixed, production possibilities curve is a
    straight line.

31
  • But the H-O model assumes that there are two
    kinds of factor inputs, the opportunity cost of
    production is increasing. That is, when a
    country's productive resources of its transfer of
    production from one product to another production
    of a product, had to give up the number of
    products will keep rising. The opportunity cost
    of increasing production possibility curve will
    have a convex shape.

32
Figure, assuming that country A is
labor-intensive, country B is
capital-intensive, the two countries as shown in
Figure PPF line.The same social indifference
curve between the two countries.
33
  • The common indifference curve I0 with A country's
    PPF is tangent at P1, with B country's PPF is
    tangent at P2, the respective tangent,
    respectively a and ß (indicated with their
    respective domestic exchange rate between the two
    countries).

34
  • The slope a is less than ß, the trade-abundant
    elements of the former labor-intensive product X
    in country A is relatively lower prices, that is,
    Y can be less for a larger number of X in the
    capital element of the country while the capital
    adequacy of the B Y-intensive products relative
    lower prices, less X-can be exchanged for larger
    Y.

35
  • After trade, the two exchange rate is r, the
    equilibrium point of trade is at R, namely r and
    I1 tangent at R. r also with PPF between the two
    countries respectively, tangent in Q1, Q2,
    therefore, A country will produce two kinds of
    commodities Q1 point, in the R-point consume two
    commodities.

36
  • X-products, A countrys production is greater
    than consumption, exports T1Q1 X-goods the Y
    goods, A is greater than consumption, the country
    production, import T1R Y-goods. Similarly, B
    country's export T2Q2 Y-goods imports T2R
    X-products.

37
  • H-O Theorem a country must export the intensive
    use of the country's relatively abundant and
    cheap factor and import of goods intensive use of
    the country's relatively scarce and expensive
    element of the goods.

38
  • In other words, labor abundant countries should
    export labor-intensive-based products, import
    capital-intensive products type of capital
    abundant countries should export
    capital-intensive products and import
    labor-intensive products.

39
  • In all that may result in differences in the
    relative commodity prices and comparative
    advantage between countries, H-O theorem that the
    countries in relative factor abundance that
    factor endowments (factor endowments) is an
    international trade, countries have a comparative
    advantage in the underlying causes and
    determinants. It is for this reason, H-O theorem
    also often referred to as factor endowment
    theory.

40
  • Under the common price ratio, the trade volume
    between the two countries are equal, that is,
    T1Q1 T1R T2R T2Q2, that is, bilateral trade
    triangle RT1Q1 and RT2Q2 are the same. But the
    level of consumption between the two countries
    have moved to a higher level of utility I1,
    showed that The two countries have been trading
    interests, but in this case equal to the trade
    interests of the two countries.

41
  • (B) partial equilibrium analysis1. The formation
    of individual commodity prices on international
    market
  • In accordance with their production possibilities
    curve and the social indifference curve, you can
    derive some sort of commodity supply curve
    between the two countries and the demand curve
    and its domestic market equilibrium price.

42
  • 2. The impact of trade on producers and consumers
  • The impact of trade on consumers depends on the
    difference that between the consumers are willing
    to pay the price of a commodity and its actual
    price paid after trade .That is consumer surplus
    .Concluded that consumer surplus had increased
    through trade.

43
  • The impact of trade on producers depends on the
    difference between the transaction price and its
    opportunity cost of goods produced by the
    producer that is the amount expressed in producer
    surplus. Producer surplus may be positive, may
    also be negative.

44
  • For the whole of social welfare, consumer surplus
    and producer surplus depends on the size of their
    own, if there is an average of two-phase
    remaining, it shows the international trade will
    bring about a net of social welfare.

45
  • 3. Terms of tradeIn economics, the ratio of
    export price (PX) in international market and
    price of imported goods (PM) in international
    market is called the country's terms of trade
    (referred to as TOT).Terms of trade (TOT) PX /
    PM

46
  • When international trade transactions are more
    than two commodities, the import and export
    prices should be calculated using the weighted
    method, as followsPX SXiPiPM SMipi

47
  • If the PX / PM ratio increased, which means you
    can exchange for more imported goods with per
    unit exported goods, this situation is improved
    terms of trade and vice versa, for the
    deteriorating terms of trade.

48
IV? The analysis of theoretical significance of
H-O model
  • Compared with the classical trade theory, H-O
    model's main contribution is reflected in the
    following two aspects
  • 1. Analyzed the production costs within the
    framework of the two or more factors of
    production.

49
  • 2. Analyzed the mutual impact between the changes
    of factors and international trade using the
    method of general equilibrium.

50
Section3 factor price equalization and income
distribution
  • First, factor price equalization theorem
  • Second, trade short-term impact on income
    distribution a specific factor model
  • Third, trade, long-term impact on income
    distribution Stolper - Samuelson theorem

51
  • 1, factor equalization theorem
  • (A) the meaning of the factor price equalization
    theorem

52
  • Even if the international mobility of factors of
    production do not have the condition, as long as
    the full development of free trade of goods, then
    the countries with the kinds of factors of
    production relative prices will tend to equal
  • At the same time, the absolute prices will tend
    to equal In other words, international trade
    would pay the same, but also make the same
    national interest. Since this proposition is
    extended H-O model, it is also known as the H-O-S
    model.

53
  • Under free trade conditions, a country will
    expand production that using its abundant factor
    intensively ,reducing production that using its
    scarce factors intensively , so that increased
    demand for abundant factors, reduced demand for
    scarce factors, in terms of price, the price of
    the previous cheaper abundant elements would
    rise, the high prices of scarcity of the original
    elements will be lowered because of reduced
    demand. At the same time, the opposite occurred
    in another country .Thatis situation is why the
    two countries the price of labor and capital
    ratios will tend to equal, namely, factor price
    equalization theorem.

54
Nation 1 is Labor abundant X is L-intensive
commodity, X is with comparative advantage.
Nation 2 is capital abundant , Y is K-intensive
commodity, Y is with comparative advantage.
The relative price of capital (interest rate) is
lower and the relative price of labor is higher
The relative price of labor (wage rate) is lower
Specializes in the production of commodity X
Specializes in the production of commodity
Y,reduces production of X (L-intensive)
The relative demand for labor rises
The relative demand for labor falls
Price of labor (wage) rises
Price of labor (wage) falls
55
  • (B) The evaluation of the factor price
    equalization theorem
  • Firstly, it demonstrated that all differences in
    factor prices, as well as factors of production
    can not be the international free flow and can
    not make a optimal allocation of resources,
    international trade as a substitute for
    international mobility factor can be indirectly
    achieved the best resources around the world
    configuration, and ultimately the factor price
    equalization.

56
  • Secondly, it illustrates the internal allocation
    of trade interests, that shows how international
    trade affect the income distribution pattern of
    trading nations.

57
  • In the H-O model, we assume that there are only
    two factors two products, product categories and
    factors is the same. However, if the factor
    types rather than products (industries) type, for
    example, three kinds of factors and two kinds of
    products, how did trade affect the production
    and income distribution?

58
  • Three factors two products model is "a specific
    factor model", assuming that certain factors are
    specific to certain industries, these factors can
    not flowed in the industry.

59
  • Specific factor model can be seen as H-O model
    that some elements can not be free flow in the
    short-term .

60
2. short-term impact of trade on income
distribution a specific factor model
  • The basic framework of a specific factor model
  • In this model, we assume that there are two kinds
    of products rice and steel. However, there are
    three factors of production inputs labor,
    capital and land, respectively L, K, T, said.

61
  • In which specific factors are capital and land,
    and capital only for steel production, the land
    only for food production, labor is a public
    factor or common factor, in the two products are
    used in production. As capital and land is
    limited to specific products, will not flow
    between departments, while the labor is used in
    elements of both departments, you can move freely
    between different departments, therefore, labor
    is also known as "mobile elements."

62
  • We also assume that the various elements to
    achieve full employment, capital and land are all
    were used in the production of steel and rice,
    while the labor resources of two departments
    equal to the total (L) that Lr Ls L, where
    Lr is the labor for the production of rice, Ls is
    the labor used to produce steel.

63
  • Under the assumption of full employment of
    factors, for the production of rice land for the
    production of iron and steel inputs and capital
    inputs are fixed, respectively, equal to the
    total amount of these two specific elements.
    Labor allocation between the two departments,
    whether the department with much more, which
    sectors are used as little uncertain. Therefore,
    the two products were determined on the
    production function as
  • Qrf(T,Lr)
  • Qsf(K,Ls)

64
  • If Specific elements (T and K) unchanged, rice
    and steel production are the production function
    of labor input.

MPL
Qrf(T,Lr)
L
65
  • Since labor is the public element of the free
    movement between the two departments. How labor
    allocation between the two sectors, depending on
    the labor market supply and demand. The following
    figure shows two departments of labor demand and
    aggregate supply of labor. Under the assumption
    of perfect competition and full employment that
    the market equilibrium wage, the national labor
    supply is equal to the total of labor in rice
    production and steel production .

66
  • The labor demand of every department is decided
    by the marginal productivity of labor and product
    price. In the profit maximization, firms pay
    wages will not exceed the value of labor is
    created there. Therefore, firms demand for labor
    (wages firms are willing to pay) is equal to
    price (P) multiplied by the marginal product of
    labor input quantity produced (the marginal
    productivity of labor, MPL). According to the law
    of diminishing marginal output, in other factor
    inputs unchanged, firms hire more labor, marginal
    product of labor less. Therefore, for any given
    product prices, labor demand is a downward curve.

67
W
W
Steel industry
Rice industry
W
W
Lr
Ls
68
  • In the picture above, the left is the labor
    demand curve of rice production sector , equal to
    the price of rice multiplied by the marginal
    output of labor in rice production. The right is
    the labor demand curve of steel production
    sector, equal to the price of steel multiplied by
    the marginal production of labor iron and steel
    output.

69
  • Lower wages, the two departments need more labor.
    When the wage is equal to W , the two
    departments of labor employed is equal to the
    total labor supply, labor market equilibrium, and
    determine the allocation of labor in the two
    sectors, but also determines the yield of the two
    departments.

70
Factor prices
  • Prices of factors of production depends on the
    value of marginal product of factors. Two
    elements in the economy, the price of labor (wage
    rate) is equal to the marginal product of labor
    and product prices, namely

71
  • w VMPL MPL PCapital price (interest rate)
    is equal to the marginal product of capital and
    price of the product, namelyi VMPK MPK
    PVMPL and VMPK respectively, the marginal
    product of labor and capital value.

72
  • In the production process, on the one hand, if
    the amount of capital investment remain
    unchanged, with the increase of labor input,
    product output increased, but the diminishing
    marginal product. At this point, if the price
    fixed, the value of marginal product of labor to
    reduce the wage rate has dropped. On the other
    hand, for a certain amount of labor input, if the
    product price changes, wage rates also come down.

73
Application of a specific factor model
  • The impact on International Trade
  • According to the definition of the labor demand
    curve, we know that an industry's product prices
    or changes in the marginal productivity of labor
    will cause the industry demand curve up and down.
    An industry's labor demand curve upward, said
    manufacturers in the industry are willing to pay
    higher wages.

74
  • In the following specific factors model, the
    labor demand curve of the rice production sector
    upward and the number of employment change, then
    the rice production sector wages could rise to a
    W2. However, as labor can move freely between
    sectors. A part of labor in the steel industry
    flow to the rice industry, the wage increase rate
    of the rice industry is not W2 but W1.

75
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  • OO ' country A total labor supply, from the O to
    the right measured labor input of X industry,
    from O' to the left measured labor input of Y
    industry. Left and right vertical axis measure X,
    Y industry wage rate.

77
  • In a closed economy, the value of marginal
    product of labor curve of X industry VMPLX and
    the value of marginal product of labor curve of
    the Y industry VMPLY intersect at E0, E0 is a
    equilibrium point. The amount of labor employed
    in X industry is OL0, the amount of labor
    employed by Y industry is O'L0, elements of
    competition between the two industries work to
    ensure access to the same wage rate W0.

78
  • In an open economy, international trade let
    country A exports X, price increases, price
    increases set E0C, VMPLX curve upward to VMPLX '.
    To simplify, assume that the price of commodity
    Y remain unchanged, then X industry exists to W2
    wage rates rise. Free mobility of labor, wage
    differences among industries will drive labor
    flow from the Y industry to the X, the end point
    of equilibrium in the E1, the number of labor
    from the Y for the L0L1 into the X, the two
    industries together wage rate increased to W1.

79
  • Considering the import and export can draw the
    following conclusions With the free trade ,
    export industry to improve return of fixed
    factors, and improve the real income the returns
    of fixed elements of import-competing industries
    will fall, real income deteriorate mobile factor
    income changes uncertain, depending on
    international exchange price, the slope of the
    marginal product value, and element suppliers of
    consumer preferences.

80
3. Long-term impact on income distribution
Stolper - Samuelson Theorem
  • In the long term, all factors of production can
    flow between the various sectors, including the
    capital. As free competition in the industry the
    production will make further adjustment. Before a
    new equilibrium point is reached the export
    sector will continue to expand the production,
    the production of import industry will be further
    reduced. The factors of production used in
    industry capacity will continue to change.

81
  • Earlier in the discussion when the factor price
    and commodity price mentioned, a rise of a factor
    price relative to other elements will lead to a
    "smaller scale" rise of the relative prices of
    goods that produced by the factors intensively
    used. Now conversely, the relative prices of a
    commodity, will accordingly let the return of
    factors of production intensively used increase
    ,but other decline. This is the basic meaning of
    Stolper - Samuelson theorem .

82
  • Assume that there are two countries A and B
    ,country A land (on behalf of capital)
    abundant, exported wheat, imported textiles
    country B labor abundant, exported textile,
    imported wheat.
  • Now, let us focus on country A, and further
    assume that the proportion of factor inputs of
    two products in country A (labor / capital) for
    30 / 2 (wheat) and 50 / 1 (cloth).

83
  • After trading, if the relative price of wheat
    rose, while the relative price of cloth decline
    ,then producers of country A will reduce the
    production of cloth, to shift resources to wheat
    production. But it may be noted, the proportion
    of factors of two products in country A is
    different, so the rate of production factors that
    additional factors of production needed for the
    production of wheat and vacated factors as
    stopping the production of cloth is different,
    each additional 100 units of production of wheat
    must use additional unit of land and give up 20
    units labor.

84
  • Also assume that a country's resource supply is
    limited, so there is a contradiction between
    supply and demand in the market of factors of
    production land prices increased due to
    increased demand, for labor prices went down due
    reduced demand, that is that the returns of land
    increased, labor factor reward reduced. the
    situation of country B is contrary.

85
  • This shows that the changes of relative prices
    of commodities will affect the changes of factor
    price and the changes of factors return. From the
    above example, the returns of factors intensively
    used in the export industry increased.

86
  • According to H-O model, the factors of production
    intensively used on export goods is its abundant
    factor, so the rise in the relative price of
    exports will lead to the rise of the real price
    of abundant factors, while actual price of the
    scarce factor or return will decline.

87
Section IV Empirical Test to the Heckscher -
Ohlin trade model of resource endowment
  • 1.The background and content of Leontief
  • 2. various interpretations of Leontief paradox

88
1.The background and content of Leontief
  • The first experience test to H-O model made by
    Leontief in 1951 and used the data of the United
    States in 1947. Because the United States was the
    world's most capital-abundant countries, Leontief
    expect to conclude that U.S. exported
    capital-intensive goods and imported
    labor-intensive goods.

89
  • He estimated the capital / labor ratio of import
    substitution not imports of the U.S. However,
    Leontief still properly drawn the following
    conclusions If the H-O theory is true, even
    though the capital-intensity of the U.S. import
    substitutes were more than its real imports
    (because the capital of the U.S. is relatively
    cheap than other countries), but its intensity
    remains less than U.S. exports.

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91
  • Leontief's calculations gave himself and others a
    confusing paradox" the United States actually
    exported labor-intensive products and imported
    capital-intensive products in 1947. The key rate
    (KX / LX) / (KM / LM) is 0.77, and according to
    H-O theory, the ratio should be greater than 1.
    The contradiction between reality and theory is
    the famous "Leontief mystery."

92
2. various interpretations of Leontief paradox
  • (A) Due to the higher efficiency of American
    workers
  • Leontief thought that in 1947, the labor
    productivity of American workers was three times
    higher than that of foreign workers, if we
    multiplied the number of U.S. labor by 3, we
    would find the United States was actually a labor
    abundant country. But this is true only in the
    United States the labor-intensity of exports is
    higher than imports. This explanation was not
    widely accepted, Leontief himself denied it
    later.

93
  • (B) due to richer human capital of the U.S.
  • The most important reason of this contradiction
    can be that the capital defined by Leontief
    includes physical capital only, while completely
    ignoring the human capital. Human capital is
    owned by the workers to improve their labor
    productivity such as education, training, health
    work etc. This implies that the labor of the
    United States included more human capital than
    other countries, the human capital added physical
    capital will enable the capital-intensity of
    exports of the United States higher than imports.

94
  • (C) due to the state of natural resources of the
    U.S.
  • Another more general bias due to Leontief using
    two factors (labor, capital) model, and ignored
    other factors such as natural resources (land,
    minerals, forests, etc.) influence. If a
    commodity is a natural resource type in the
    two-factor model ,then it is clearly not correct
    to divide it into capital or labor-intensive
    goods. In addition, many production processes
    require the use of natural resources, such as
    mining, steel industry, agriculture, etc., also
    need a lot of physical capital. The United States
    depends heavily on imports of many natural
    resources, which may help explain the higher
    capital-intensity of the U.S. import
    substitution industry.

95
  • (D) caused by the production factor intensity
    reversal
  • (E) due to the U.S. trade policy
  • U.S. tariff policy is also important reason for
    Leontief paradox. Customs duty on imports in
    fact, it reduces imports and stimulate domestic
    production of import substitutes. Kravis found
    that in 1954, the most stringent industry by the
    trade protection in the United States is
    labor-intensive industries. This has affected the
    U.S. trade patterns, reducing U.S. imports of
    labor-intensive. This helped to explain the
    Leontief paradox.

96
  • (6) caused by the demand reversal
  • In the H-O model, we assume that consumer
    preferences between the two countries are
    identical and, therefore, international trade
    pattern depends only on difference of natural
    resources endowment , but not demand. But the
    decided factors of international trade may come
    from supply-side and also come from the demand
    side.

97
  • There are numerous ways that demand factors
    affected international trade, for example, when a
    country have a comparative advantage on a product
    production , and its people have a special
    preferences on this product, it will make the
    relative price of products rise, so the direction
    of import and export determined by H-O model
    originally will change , that means demand
    reversal.
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