Heckscher-Ohlin model, cha

International Trade

The Heckscher-Ohlin model Chpater 5

Introduction

This model shows that comparative advantage is influenced by the interaction between nations’ resources (the relative abundance of factors of production) and the technology of production (which influences the relative intensity with which different factors of production are used in the production of different goods).

Two-factor Economy

The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce. Also referred to as the H-O model or 2x2x2 model (two countries, two goods, two factors of production). The key difference with the Specif Factor Model is that in the H-O model, we assume that the immobile factors that were specific to each sector (capital in cloth, land in food) are now mobile in the long run.

Prices and production

The amount of cloth and food produced, given how much capital and labor are employed in each sector, is determined by:

QC = QC (KC, LC) QF = QF (KF, LF)

aKC = capital used to produce one yard of cloth aLC = labor used to produce one yard of cloth aKF = capital used to produce one calorie of food aLF = labor used to produce one calorie of food

Practical example

aKC = 2; aLC = 2 aKF = 3; aLF = 1

2QC = aKC x QC ; 2QC = aLC x QC 3QF = aKF x QF ; 1QF = aLF x QF

aKC * QC + aKF * QF < K or 2QC + 3QF < 3,000 aLC * QC + aLF * QF < L or 2QC + QF < 2,000.

Choosing the mix of outputs

A farmer can choose between using relatively more mechanized equipment (capital) and fewer workers (labor), or vice versa. He will face not fixed input requirements (as in the Ricardian model) but trade-offs like the one of the Figure, which shows alternative input combinations for producing food. The choice depends on the relative costs of capital and labor. If capital rental rates are high and wages low, farmers will choose to produce using little capital and more labor...

Effects of International Trade betweem two factors economies

step 1

Difference in the relative prices of the products

Difference in the relative price of factors

Difference in factor endowments

Pattern of comparative advantage

Duis autem vel eum iriure dolor in hendrerit in

+info

Trade and distribution of income

International trade can have a powerful effect on the distribution of income, even in the long run. In Home, where the relative price of cloth rises, people who get their incomes from labor gain from trade, but those who derive their incomes from capital are made worse off. In Foreign, where the relative price of cloth falls, the opposite happens: Laborers are made worse off and capital owners are made better off.

Trade and distribution of income

Owners of a country’s abundant factors gain from trade, but owners of a country’s scarce factors lose. the theoretical argument regarding the aggregate gains from trade is identical to the specific factors case: Opening to trade expands an economy’s consumption possibilities so there is a way to make everybody better off. However, one crucial difference exists regarding the income distribution effects in these two models