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Heckscher Ohlin trade model

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Heckscher-Ohlin Theory of Trade• A country will export products that use relatively

intensively those production factors found relatively abundantly in the country, and import products that use relatively intensively those production factors that are relatively scarce in the country.

• H-O comparative advantage is actually a triple comparison:-across countries-across products-across factors of production

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Heckscher-Ohlin Theory of Trade

• 2 factors of production, 2 goods and 2 countries model

• Differences in factor endowments determines trade.

• Capital rich countries will export capital intensive products.

• Labor rich countries will export labor intensive products.

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assumptions

1. No transport costs.2. Perfect competition in commodity and factor

markets.3. Production function homogeneous of first degree.4. Production function such that the two

commodities show different factor intensities.5. Production functions differ between commodities

but are the same in both the countries.

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Factor abundance and intensity

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

• A product is relatively labor intensive if labor costs are a greater share of its value than they are of the value of other products.

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How Free Trade Affects Income Distribution in the Long Run

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Winners and Losers: Short Run Versus Long Run

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International Factor Price Equalization

• With the shift to free trade: For each factor, its rate of return becomes more similar between countries. Under ideal conditions, its real rate of return is the same in different countries.

• Example: Labor.• With no trade, the wage rate is high in the labor-scarce

country. The wage rate is low in the labor-abundant country.

• With free trade, the import of labor-intensive products pushes the wage-rate down in the labor-scarce country. The export of labor-intensive products pulls the wage rate up in the labor-abundant country.

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Shares of the World’s Factor Endowments, Early 2000s

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U.S. International Trade in Selected Products, 2004

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Empirical test

• Leontief Paradox 1951• Results showed Us to be exporting labor

intensive products.• Explanation of the paradox – natural

resources, skilled labor, different kinds of capital.