1、Kuanqi Du nust 2003,Lecture 4.THE HECKSCHER-OHLIN THEORY (Ch 4),Kuanqi Du nust 2003,Assumptions A13. (in place of A11) Two factors of production: labor (L) and capital (K). Rentals (R) paid to capital (K), wages (W) paid to labor (L). A14. Identical technologies of production in two countries. The a

2、ctual choice of production technique in each country depends on factor prices in each country. E.g., cheap labor labor intensive technique,Kuanqi Du nust 2003,A15. T is labor intensive and S is capital intensive. In both A and B, for given wage and rental, T always uses more labor (relative to capit

3、al) than S.,Kuanqi Du nust 2003,A16. A is capital abundant, B is labor abundant. Note: Factor endowment is defined for countries and factor intensity is defined for industries.,Kuanqi Du nust 2003,Kuanqi Du nust 2003,Adding the Demand Side,A17. Identical tastes Identical demand conditions The combin

4、ation of PPF and Indifference curves produces autarky equilibrium. Q: Find and compare the autarky RPs in the two countries. Which country has comparative advantage in S?,Kuanqi Du nust 2003,Autarky Equilibrium,Kuanqi Du nust 2003,The Heckscher-Ohlin Theorem,A country has comparative advantage in th

5、e product whose production is intensive in the factor with which that country is abundantly endowed. Application: Country A is capital abundant. Product S is capital intensive. Then, A has comparative advantage in S as it has a lower RP of S than B does.,Kuanqi Du nust 2003,Equilibrium with Trade,In

6、 AIn B Initial condition Comp Adv.ST RP of Slowhigh With Trade RP of S rises falls Production of Sincreases decreases Production of Tdecreases increases,Kuanqi Du nust 2003,Figure 4.04a Trade equilibrium in the HO model,Kuanqi Du nust 2003,Figure 4.04b Trade equilibrium in the HO model,Kuanqi Du nus

7、t 2003,Figure 4.04 Trade equilibrium in the HO model,Kuanqi Du nust 2003,Figure 4.05c,d Reciprocal demand in the classical and HO models,Kuanqi Du nust 2003,Figure 4.03 The effect of rising world prices of good S on country As trade,Kuanqi Du nust 2003,Figure 4.06 The importance of assuming identica

8、l tastes,Kuanqi Du nust 2003,Incomplete Specialization,In the H-O model, OC of S rises as its production increases. It results in incomplete specialization. Q: Discuss why A will not increase the production of S any further.,Kuanqi Du nust 2003,Trade equilibrium in the Classical Model,Kuanqi Du nust

9、 2003,The Three Theorems,The Factor Price Equalization Theorem The Stolper-Samuelson Theorem The Rybczynski Theorem,Kuanqi Du nust 2003,1. The Factor Price Equalization Theorem,Free trade leads to the international equalization of individual factor prices. in Ain B Initial Wageshighlow rentslowhigh

10、With trade Wagesfallsrises rentsrisesfalls Wages are equalized across countries even if there is no international mobility of labor. Free trade is a substitute for free mobility of productive factors.,Kuanqi Du nust 2003,Why does the FPE not hold in reality?,Trade is not free. There are barriers, na

11、tural and man-made. Productivities are different. Technologies are different.,Kuanqi Du nust 2003,2.The Stolper-Samuelson Theorem,Free trade benefits the abundant factor and harms the scarce factor. In A, abundant in capital, rents rise while wages fall with trade. This benefits capital owners (the

12、abundant factor) and hurts workers (the scarce factor). In B, the opposite happens.,Kuanqi Du nust 2003,Political Economy of Trade,Who will be more likely to oppose free trade? the owners of scarce factors of production the producers of import-competing products the consumers of export products Who

13、will be free traders? the owners of abundant factors of production the producers of export products the consumers of import products Q: Does a country as a whole gain? How can we show it?,Kuanqi Du nust 2003,3. The Rybczynski Theorem,If a country experiences an increase in the supply of one factor,

14、it will, at constant world prices, produce more of the product intensive in that factor and less of the other product.,24,Some Exercises,25,Australia is land abundant; India is labor abundant. Wheat is land intensive relative to textiles.,Once trade starts, what factor(s) gains in Australia? What gr

15、oups of people will be against trade in India? Mention 3 groups. Does India gain from trade for the country as a whole?,26,Graphically demonstrate the pre- and post-trade equilibrium between these two countries. In your diagram, be sure to put wheat on the X axis and textiles on the Y axis. Mark the

16、 pre-trade equilibrium with “A” and post-trade production with “B” and post-trade consumption with “C”.,27,Definitions,Let Kj and Lj denote the capital and labor stocks of country j (j = A, B), then A is said to be capital abundant relative to B if _. According to the Heckscher-Ohlin (HO) model the source of comparative advantage is a coun