5 Hechscher Oblin H O Model The Hechscher Oblign H O Model 1 Assumptions 2 Autarky in H O Model a PPFs b Supply Curves c Demand Curves and Autarky Equilibrium 3 International Trade in H O Model a The H O Theorem b Post Trade Relative Price c CPFs d Trade Triangles 4 The Leontieff Paradox Resolution 5 The Impact of Trade a Short Run b Long Run Stolper Samuelson Theorem c Trade Politics A first look New Assumptions 1 Only two resources Simplifying Labor L and Capital K 2 Both countries have access to the same technology Neither simplifying or critical 3 4 Stacks the odds against us Making harder for us to get our results benefits from trade exists anyway rules out the easy but unrealistic explanation for international trade Increasing opportunity costs of production Critical PPF is curved Increasingly negative slope Curved In both countries one of the goods makes relatively intensive use of one of the resources Let K and L be the two resources and let x and y be 2 goods X is relatively K intensive if K L K L x y It is K intensive in both countries 5 One country is relatively abundant in one resource Let K and L be the two resources and let A and B be the 2 countries Country A is relatively K abundant if K L Since Country A is relatively K abundant Country B will be relatively L K L B A abundant K abundant country will have comparative advantage in K intensive good firms will move production to a point on the PPF where PC P W Faced with any Qw QC PC PW Cost of moving along the PPF 0 5 Hechscher Oblin H O Model If Qw QC PC P W If Qw QC PC P W Increase in revenue from producing more cell phones Loss in revenue from producing less wheat Increased profits from moving down the curve Increase in revenue from producing more wheat Loss in revenue from producing less cell phones Increased profits from moving up the curve H O Theorem Countries will have a comparative advantage in and export those goods that make relatively intensive use of their relatively abundant resource Equilibrium conditions under trade PC P W US 1 2 US imports ROW exports ROW T PC P W PC PW Difference from Ricardian model Neither country completely specializes they will produce some of each good Leontieff Paradox US is capital intensive so according to the H O model it should export capital intensive goods but Leontieff found 1 US exports labor intensive goods 2 Imports both capital and labor intensive goods Example of types of resources 1 Arable land 2 Physical capital K 3 Human capital L cannot be separated from labor hours 4 Labor Hours L cannot be separated from human capital US Relative abundance at the time 1 High skilled labor HSL 2 Arable land A 3 Physical capital K ROW Relative abundance at the time 1 Less skilled labor 2 Medium skilled labor 3 Specific resources depending on the country 4 Specific weather patterns boosts certain crops US Leading exports 5 Hechscher Oblin H O Model Grain crops A K Aircrafts HSL K Pharmaceuticals HSL Financial services HSL Entertainment HSL K Education HSL Distributional impacts of trade Assume Labor has different levels HSL MSL LSL 2 resources HSL LSL 2 goods Software Clothes US relatively HSL abundant ROW relatively LSL abundant Software relatively HSL intensive and clothing relatively LSL intensive Short run Resources are immobile between industries no labor migration Long run Resources are entirely mobile between industries Therefore HSL each type of labor LSL C Ratio is what is important not the absolute amount of LSL S HSL Under long run autarky equilibrium across both industries HSL earns the same wage across both industries and LSL earns the same wage Post trade Pc P S US falls o PS increases software industry expands derived demand for labor in the o PC decreases clothing industry shrinks derived demand for labor in the software industry increases clothing industry decreases In the post trade short run Short run no movement along the PPF because you can t change production quantities yet Increase in labor demand in the software industry o Since software is relatively HSL intensive Demand for HSL labor in the software industry increases a lot Demand for LSL labor in the software industry increases but less o Labor supply cannot change in the SR Wages in the software industry increase Large increase for HSL labor Small increase for LSL labor 5 Hechscher Oblin H O Model Decrease in labor demand in the clothing industry o Since clothing is relatively LSL intensive Demand for HSL labor in the clothing industry decreases but a little Demand for LSL labor in the clothing industry decreases a lot o Labor supply cannot change in the SR Wages in the clothing industry decrease Small decrease for HSL labor Large decrease for LSL labor In the short run wages in the comparative advantage industry increases regardless of type of labor In the long run post trade equilibrium Labor moves from the clothing industry to the software industry o Until long run wage HSL in wage rate of both countries are the same Magnitude of the rightward shift of the software industry s HSL LS curve Magnitude of the leftward shift of the clothing industry s HSL LS curve o Same amount of labor in the entire economy When someone leaves the clothing industry for the software industry o Get a higher wage in the software industry create a scarcity in the Both industries end up with a higher equilibrium wage WH e2 than pre trade Total demand of HSL increases overall HSL equilibrium wage post trade clothing industry WH e1 increases industry lose o In the long run HSL regardless of industry gain and LSL regardless of HSL relatively abundant resource LSL Relatively non abundant resource Stolper Samuelson Theorem Software Comparative advantage industry SR LR SR LR Clothing Non comparative advantage industry SR LR SR LR In the long run international trade benefits owners of a country s relatively abundant resource s and harms owners of the relatively non abundant resource Income equality post trade In rich countries Inequality increases o HSL wages increase LSL wages decrease o Side payments need to occur In poor countries Inequality decreases o LSL wages increase HSL wages decrease o Side payments do not need to occur