The Heckscher-Ohlin ModelIntroductionSlide 3Heckscher-Ohlin ModelAssumptions of the Heckscher-Ohlin ModelSlide 6Slide 7Slide 8Are Factor Intensities the Same Across Countries?Slide 10Heckscher-Ohlin Model No Trade EquilibriumSlide 12Slide 13Heckscher-Ohlin Model Free Trade EquilibriumSlide 15Slide 16Heckscher-Ohlin ModelSlide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Effects of Trade on Factor PricesSlide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Opinions Toward Free TradeSlide 44Slide 45Slide 46Extending the Heckscher-Ohlin ModelSlide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56Slide 57Food Imports Close to Matching Level of ExportsExtending the Heckscher-Ohlin TheoremSlide 60Slide 61Slide 62Slide 63Why does India Import Cotton Textiles?Slide 65Slide 66The Heckscher-Ohlin Model1 H-O Model 2Empirical Evidence 3Conclusions4© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor2 of 113Introduction•The Heckscher-Ohlin model (HO) shows how trade occurs because countries that have different resources.•They wanted to explain this increase in trade during the “golden age” of international trade.•H-O assumed that technologies were the same across countries, but had an uneven distribution of resources.© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor3 of 113Introduction•The specific factors model in the last chapter was a short run model since capital and labor could not move between industries.•The HO model is a long run model because all factors of production can move between the industries.•GeneralizationsMany factors and goodsDiffering productivities© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor4 of 113Heckscher-Ohlin Model•Two countries: Home and Foreign.•Two goods: computers and shoes.•Two factors of prod’n: labor (L) and capital (K). •Resource constraint equations:Capital in each good for each countryK = KC + KS and K* = K*C + K*SLabor in each good for each countryL = LC + LS and L* = L*C + L*S© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor5 of 113Assumptions of the Heckscher-Ohlin Model1. Both factors can move freely between industries.R and W must be the same in both industries.2. Shoe production is labor-intensive; it requires more labor per unit of capital to produce shoes than computers, so that LS/KS > LC/KC.This means that computer production is capital-intensive.Figure 4.1 shows relative demand curves for labor in each industry.© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor6 of 113Assumptions of the Heckscher-Ohlin ModelFigure 4.1© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor7 of 113Assumptions of the Heckscher-Ohlin Model3. Foreign is labor abundant. Equivalently, Home is capital abundantL*/K* > L/K and K/L > K*/L*Here, we do not consider why the amount of resources differs across countries. Take as given.4. The final outputs, shoes and computers, can be traded freely, without restrictions, between nations, but labor and capital do not move between countries.Latter assumption will be relaxed in the next chapter.© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor8 of 113Assumptions of the Heckscher-Ohlin Model5. The technologies used to produce the two goods are identical across the countries.This is opposite of the assumption in the Ricardian model.6. Consumer tastes are the same across countries, and preferences for computers and shoes do not vary with a country's level of income.These are not realistic assumptions, but they allow us to focus on differences in factor endowments as the basis for trade.APPLICATION © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor9 of 113Are Factor Intensities the Same Across Countries?•As part of our assumptions, we assume that factor intensities in each industry are the same in both countries.E.g. shoes are labor intensive in both countries•Although all countries may have access to the same technologies, the machines used in the U.S. are different from those used in Asia and elsewhere.•While the U.S. still produces some shoes, the production is different from the production in Asia.APPLICATION © 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor10 of 113Are Factor Intensities the Same Across Countries?•Asian production uses old technology and workers earn relatively little compared to the U.S.Labor intensive in Asia.•In call centers, technologies and therefore factor intensities are similar across countries.•So, shoes in India are labor intensive compared to the call center—the opposite of the U.S.•This illustrates Reversal of Factor Intensities between the two countries.Holds for all Wage/Rental ratios.We will ignore the possibility of “factor intensity reversals.”© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor11 of 113Heckscher-Ohlin ModelNo Trade Equilibrium•As always, start with the no-trade equilibrium.•Factor abundance and intensity (combined with total endowments) determine the shape of the PPFs:Home is capital abundant and computer production is capital intensive.Home is capable of producing more computers than shoes.Foreign is labor-abundant and shoe production is labor-intensive.Foreign is capable of producing more shoes.•Indifference CurvesConsumer tastes are the same across countries, so the shape of the indifference curves is the same in each country.© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor12 of 113Heckscher-Ohlin ModelNo Trade EquilibriumNo-Trade Equilibria in Home and ForeignFigure 4.2© 2008 Worth Publishers ▪ International Economics ▪ Feenstra/Taylor13 of 113Heckscher-Ohlin Model•No Trade Equilibrium PriceThe no-trade prices reflect the differing amounts of resources found in the two countries.Foreign has abundant labor.Shoe production is labor intensive.The no-trade relative price of shoes is lower in Foreign.People in Foreign are willing to give up more shoes for one computer since they have a lot of shoes.The same logic applies to Home.Home has abundant capital.Computer production is capital intensive.The no-trade relative price of shoes is lower in Home.© 2008 Worth Publishers ▪