Heckscher-Ohlin Model

10 Key excerpts on "Heckscher-Ohlin Model"

• 

  eBook - PDF

  Introduction to International Economics

  • Dominick Salvatore(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  At the United Nations climate change conference in Cancun, Mexico in December 2010, wealthy nations pledged to set up a $100 billion annual fund to help poor countries develop on a cleaner path. SUMMARY 1. The Heckscher–Ohlin theory presented in this chapter extends our trade model of Chapter 3 to explain the basis of (i.e., what determines) comparative advantage and to examine the effect of international trade on the earnings of factors of production. These two important questions were left largely unanswered by classical economists. This chapter also examines other complementary trade theories that base international trade on economies of scale, product differentiation, or technological differences among nations. 2. The Heckscher–Ohlin, or factor-endowment, theory can be expressed in terms of two theorems. According to the Heckscher–Ohlin (H–O) theorem, Chapter Four The Heckscher–Ohlin and Other Trade Theories 103 a nation will export the commodity intensive in its relatively abundant and cheap factor and import the commodity intensive in its relatively scarce and expensive factor. According to the factor–price equalization theorem, international trade will bring about equalization in the returns or earnings to homogeneous or identical factors across nations. 3. The Stolper–Samuelson theorem postulates that free international trade reduces the real income of the nation’s relatively scarce factor and increases the real income of the nation’s relatively abundant factor. If some factors are specific (i.e., can only be used in some industries, as often occurs in the short run), the specific-factors model postulates that trade will have an ambiguous effect on the nation’s mobile factor, benefits the immobile factor that is specific to the nation’s export commodities or sectors, and harms the immobile factor that is specific to the nation’s import-competing commodities or sectors.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  International Economics

  • Dominick Salvatore(Author)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  However, by correcting an important source of bias in the Minhas study, Leontief showed in 1964 that factor reversal occurred in only about 8 percent of the cases studied, and that if two industries with an important natural resource content were excluded, factor reversal occurred in only 1 percent of the cases. A study by Ball, published in 1966 and testing another aspect of Minhas’s results, confirmed Leontief’s conclusion that factor–intensity reversal seems to be a rather rare occurrence in the real world. As a result, the assumption that one commodity is L intensive and the other commodity is K intensive (assumption 3 in Section 5.2) at all relevant relative factor prices generally holds, so that the H–O model can be retained. S U M M A R Y 1. The Heckscher–Ohlin theory presented in this chapter extends our trade model of previous chapters to explain the basis of (i.e., what determines) comparative advantage and to examine the effect of international trade on the earnings of factors of production. These two important questions were left largely unanswered by classical economists. 2. The Heckscher–Ohlin theory is based on a number of simplifying assumptions (some made only implicitly by Heckscher and Ohlin). These are (1) two nations, two commodities, and two factors of production; (2) both nations use the same technology; (3) the same commod- ity is labor intensive in both nations; (4) constant returns to scale; (5) incomplete specialization in production; (6) equal tastes in both nations; (7) perfect competition in both commodities and factor markets; (8) perfect internal but no international mobility of factors; (9) no transporta- tion costs, tariffs, or other obstructions to the free flow of international trade; (10) all resources are fully employed; and (11) trade is balanced. These assumptions will be relaxed in Chapter 6. 126 Chapter 5 Factor Endowments and the Heckscher–Ohlin Theory 3.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  International Economics

  • Dominick Salvatore(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Section 6.4 shows the importance of imperfect competition as the basis of a great deal of today’s international trade. Section 6.5 presents models that base international trade on differences in dynamic changes in technology among nations. Finally, Section 6.6 examines the effect of transportation costs and environmental standards on the location of industry and the flow of international trade. The appendix examines external economies and their importance for international trade. 6.2 The Heckscher–Ohlin Model and New Trade Theories In this section, we relax the assumptions of the Heckscher–Ohlin theory discussed in Sec-tion 5.2. We will see that relaxing the assumptions does not affect the validity of the basic Heckscher–Ohlin model, but points to the need for new, complementary trade theories to explain the significant portion of international trade that the Heckscher–Ohlin theory leaves unexplained. Relaxing the first assumption (two nations, two commodities, and two factors) to include more than two nations, more than two commodities, and more than two fac-tors, while certainly complicating the analysis, leaves the H–O model basically valid, as long as the number of commodities is equal to or larger than the number of factors. One 6.2 The Heckscher–Ohlin Model and New Trade Theories 139 complication that arises in dealing with more than two factors is that we can no longer classify a commodity simply as L or K intensive but will require the construction of a factor-intensity index to predict the pattern of trade. This can be complex but should still be possible. The second assumption of the Heckscher–Ohlin theory (i.e., that both nations use the same technology in production) is not generally valid. That is, nations often do use different technologies in the real world.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Advanced International Trade

  Theory and Evidence - Second Edition

  • Robert C. Feenstra(Author)
  • 2015(Publication Date)
  • Princeton University Press

    (Publisher)

  2 The Heckscher-Ohlin Model W e begin this chapter by describing the Heckscher-Ohlin (HO) model with two countries, two goods, and two factors (or the two-by-two-by-two model). This formulation is often called the Heckscher-Ohlin-Samuelson (HOS) model, which is based on the work of Paul Samuelson, who developed a mathemat-ical model from the original insights of Eli Heckscher and Bertil Ohlin. 1 The goal of that model is to predict the pattern of trade in goods between the two countries, based on their differences in factor endowments. Following this, we present the multigood, multifactor extension that is associated with the work of Vanek (1968), and is often called the Heckscher-Ohlin-Vanek (HOV) model. As we shall see, in this latter formulation we do not attempt to keep track of the trade pattern in indi-vidual goods but instead compute the “factor content” of trade, that is, the amounts of labor, capital, land, and so on embodied in the exports and imports of a country. The factor-content formulation of the HOV model has led to a great deal of empirical research, beginning with Leontief (1953) and continuing with Leamer (1980), Bowen, Leamer, and Sveikauskas (1987), Trefler (1993a, 1995), Davis and Weinstein (2001), with many other writers in between. We will explain the twists and turns in this chain of empirical research. The bottom line is that the HOV model performs quite poorly empirically unless we are willing to dispense with the assumption of identical technologies across countries. This brings us back to the earlier tradition of the Ricardian model of allowing for technological differ-ences, which also implies differences in factor prices across countries. We will show several ways that technological differences can be incorporated into an “extended” HO model, with their empirical results, and this remains a question of ongoing research.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  International Trade Theories and the Evolving International Economy

  • Richard Anthony Johns(Author)
  • 2013(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  Perhaps the empirical predictions of the Ricardian model, less rich but less complex, should not be thrust aside lightly. ENVOI Clearly the greater explanatory ambitions of the Heckscher-Ohlin Model commanded its attention as the centrepiece of trade thought in the period 1919-1954. The integration of factor markets and goods markets created the first general equilibrium attempt to combine what Robinson (1956: 109) calls 'the array offerees which explain export-import patterns under free trade conditions. As a theory, however, it remained in the classical tradition of ignoring the importance of antecedant development differen-tials, the adjustment process and country differences in reallocative abilities, etc. Nevertheless, it attracted support for it was clearly a considerable achievement, despite its tendency towards a continued supply 202 The explanation of trade flows bias in the explanation given for comparative cost differentials, emphasis-ing, as it did, the link between the factor content of trade and the commodity compositon of trade. However, explanatory power can only be related to proven verification. Sufficient doubt persisted after the Leontief Paradox 1 about the relevance of H-O theory to inspire a series of quite new approaches. Some of these avoided the traditional omniscient general theory approach to explain particular exchange phenomena. Others were a direct response to the disparities within the international trading system that had been exposed after 1945 and to a realisation (Todarro( 1981: 349)) that: relative factor endowments and comparative costs ... are often determined by, rather than determining, the nature and character of international specialization. In the context of unequal trade between rich and poor nations, this means that any intial state of unequal resource endowments will tend to be reinforced and exacerbated by the very trade which these differing resource endowments were supposed to justify.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  International Trade and Agriculture

  Theories and Practices

  • Won W. Koo, P. Lynn Kennedy(Authors)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  For example, Japan has very little agricultural land per person in comparison with the United States. China has a small amount of capital per person relative to either the USA or Japan. Given these differences in endowments, it is logical that coun- tries will focus their production on those commodities that use their abundant resources most intensively. Since the USA has a larger relative endowment of land than Japan, the USA will likely export land-intensive commodities, such as beef, to Japan. Similarly, China will export labor-intensive goods to the USA and Japan, while the USA and Japan will export capital-intensive goods to China, since the USA and Japan have more capital per unit of labor than China. A large amount of international trade theory involves the examination of endow- ments and their impact on international trade. The framework that shows the rela- tionship between endowments and the pattern of trade is known as the endowment model. This chapter uses the endowment model to show the linkage between factor intensity, factor abundance, and the pattern of trade. The assumptions used in the Heckscher-Ohlin Model are introduced and the Heckscher-Ohlin theorem is explained, along with an empirical test of the Heckscher-Ohlin theorem. An overview of the related factor-price equalization theorem and its implications for income distribution is also presented. W 4.1 ASSUMPTIONS OF THE THEOREM The Swedish economists Eli Heckscher and Bertil Ohlin formulated a theory explain- ing a nation’s comparative advantage on the basis of factor endowments. The U Y V Y - - - - - Y Y + THE HECKSCHER- OHLIN THEOREM - p - m - - - - _ - - Heckscher-Ohlin theorem, therefore, is also known as the factor-endowment theorem. This theorem states that comparative advantage is explained by differences in resource endowments such as labor and capital.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The International Economy

  • Peter B. Kenen(Author)
  • 2000(Publication Date)
  • Cambridge University Press

    (Publisher)

  These dif fi culties do not arise when we add countries, goods, and factors simultaneously but maintain “evenness” in the numbers. It is not easy to interpret the conclusions, however, because the notions of factor abundance and factor intensity lose their simplicity. Empirical work on the Heckscher–Ohlin model has produced surprises. Early work by Leontief suggested that the United States is a labor-abundant country rather than a capital-abundant country; its export production is more labor-intensive than its import-competing production. The paradox is not adequately explained by demand reversals or factor reversals. It is perhaps explained by the omission of natural resources and of skills or human capital from Leontief’s calculations. The Stolper–Samuelson theorem might also lead us to connect the widening of wage dispersion in the United States with the rapid growth of exports from developing countries, as they are well endowed with unskilled labor. Yet the increase in trade with developing countries does not seem to explain an appreciable part of the increase of wage dispersion in the United States. RECOMMENDED READINGS Many important contributions to the literature on the Heckscher–Ohlin model relate to the general version developed in Chapter 6, and some of them are listed at the end of that chapter. Here are some readings that do not relate speci fi cally to that version and some that deal with quantitative work: Questions and Problems 81 Most of the basic results in this chapter were stated or anticipated by Eli Heckscher and Bertil Ohlin; their contributions, newly translated, appear with an excellent introduction in Harry Flam and M. June Flanders, eds., Heckscher–Ohlin Trade Theory (Cambridge, Mass.: MIT Press, 1991).

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  International Trade

  New Patterns of Trade, Production and Investment

  • Nigel Grimwade(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  It was left to the Neo-Classical school to suggest an explanation. This was provided simultaneously, but independently, by two economists, namely, Eli Heckscher (1879-1952) and a Swedish economist, Bertil Ohlin (1899-1979), writing in the early 20th century. They explained differences in comparative costs in terms of differences in the amounts of different factors with which countries were endowed and differences in the factor proportions required for the production of different goods. Different goods require for their production different proportions of the various factors of production (land, labour, capital). At the same time, countries possess different amounts of these factors. Some countries are well endowed with land, others with labour and still others with capital. This means that the relative prices of these factors will differ in different countries. Because factor prices differ, the costs of producing the same good will vary between one country and another. For example, the cost of producing labour-intensive goods will be lower in countries where labour is relatively abundant. In brief, countries will enjoy a comparative advantage in the production of those goods, which use relatively large amounts of the country's most abundant factor of production. Thus, countries in which labour is abundant will possess a comparative advantage in labour-intensive goods. Other countries in which capital is the most abundant factor will enjoy a comparative advantage in capital-intensive goods. It is important to state the assumptions on which the theory is based. These may be listed as follows: Trade takes the form of an exchange of two goods, which use just two factors in their production, between two countries (a So-called 2x2x2 model of trade). Products are homogeneous so that there is nothing to distinguish the product of one seller from that of another, that is, no product differentiation. Each country has the same production function for a particular good

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Competitiveness In International Food Markets

  • Maurey E Bredahl(Author)
  • 2019(Publication Date)
  • CRC Press

    (Publisher)

  both are caused by the difference in technology.

  The Reaction

  The pattern of world trade sits uncomfortably with comparative advantage. There is no logical inconsistency here, but this is of little comfort if comparative advantage addresses concerns only tangential to actual world commerce. But why should we care? Because comparative advantage has normative implications. These implications are important if actual trade is due significantly to comparative advantage, but may be misleading otherwise. For example, DC-LDC trade, between countries with significant differences in economic structure, would appear to promise large gains, and DC-DC trade would likewise seem to offer modest gains, if comparative advantage explains trade. This would seem to imply that we ought to try hard to integrate the LDCs into the world economy and not worry over much about new marginal barriers to trade among the DCs. But this policy prescription could easily be disastrously wide of the mark if trade is in fact driven by considerations quite different from comparative advantage.

  But what other candidates are there? There is in fact a very old one: increasing returns to scale. The fundamental idea behind comparative advantage is that countries trade in order to exploit their differences. Another possibility is that they might trade in order to specialize , that is, to become more productive by doing less but doing it better. Alternatively, they might trade to enlarge markets and thereby increase competition. Formal models help here.

  Intra-industry Trade

  Scale economies can offer a basis for intra-industry trade. Assume that increasing returns are external to the firm and internal to the national manufacturing industry. Also, disaggregate the manufacturing sector. That is, suppose that there are n distinct manufacturing sub industries, each producing a differentiated product. Unlike the Heckscher-Ohlin-Samuelson model, there is only one primary factor—labor. Each subindustry possesses the following technology. Each firm behaves as if it were subject to constant returns to scale. However, its productivity depends in fact on the size of the national subindustry. There are increasing returns to scale that are external to the firm and internal to the national industry. But the scale economies decrease with the size of the subindustry. The number n

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Applied International Economics

  • W. Charles Sawyer, Richard L. Sprinkle(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)
• The factor-proportions theory suggests that differences in relative factor endowments between countries determine the basis for trade. The theory states that a country has a comparative advantage in, and exports, the good that intensively uses the country’s abundant factor of production. Conversely, a country has a comparative disadvantage in, and imports, the good that intensively uses the country’s relatively scarce factor of production.
• Firms within an industry are not homogenous. Even in autarky, some firms are much more productive than others. With trade, the least efficient firms exit the comparative disadvantage industries. In the comparative advantage industries, the most productive firms realize much of the gains from trade and are able to expand.
• The factor-price equalization theorem states that international trade would equalize factor prices between countries. As such, in the long-run there is a tendency toward factor-price equalization.
• The Stolper-Samuelson theorem states that an increase in the relative price of a commodity raises the real price of the factor used intensively in the commodity’s production and reduces the real price of the other factor. These changes in factor prices tend to increase the percentage of national income the abundant factor receives. The reverse is true for the scarce factor.
• In a country where labor is scarce, international trade has the potential to increase income inequality. However, other factors are much larger contributors to this phenomenon than international trade.
• The specific-factors model shows that owners of capital specific to export- or import-competing industries tend to experience gains or losses from international trade. Workers find that their welfare may rise, fall, or remain the same depending on their consumption of the various goods.
• Leontief, using 1947 data, conducted the first empirical test of the factor-proportions model. He found that the production of U.S. goods, which were substitutes for imports, were more capital intensive than were U.S. exports. His findings became known as the Leontief paradox. A number of possible explanations for the perverse result have been given over the years. The paradox tends to be resolved by considering human capital and technology as separate factors of production.