chapter4 - L Karp International Trade November 23, 2007 4...

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LKarp International Trade November 23, 2007 4 The Heckscher-Ohlin-Samuelson model This section presents the four basic theorems of the Heckscher-Ohlin-Samuelson (HOS) model: (i) the Factor Price Equalization theorem, (ii) the Stopler Samuelson theorem, (iIi) the Rybczyn- ski theorem, and (iv) the Heckscher-Ohlin theorem. The factor price equalization theorem gives conditions under which trade in commodities is a perfect substitute for the international mobility of factors. The Stopler-Samuelson theorem gives conditions under which a change in relative commodity prices has an unambiguous effect on real factor returns. The Rybczynski theorem shows how a change in factor supply alters production, holding fixed all prices. Fi- nally, the Heckscher-Ohlin theorem shows the relation between relative factor endowments and comparative advantage. Recall from chapter 1 that comparative advantage, and thus the direction of trade, depends on a comparison of relative prices in autarky. In the Ricardian model, autarky prices are com- pletely determined by technology; there a difference in technology between two countries is the basis for trade. The HOS model provides an explanation for trade based on different factor endowments – in particular, a difference in relative factor endowments, rather than different technology or different tastes, or something else. There is a single factor of production in the Ricardian model In the Ricardo-Viner model thereisas ing lemob i lefac torof production, but sector-specific factors in each sector. In the HOS setting there are two or more mobile factors. We will consider the special case of this model where there are two commodities and two mobile factors of production, capital and la- bor. These factor move freely across sectors, so the wage rate and the rental rate must be the same in both sectors, within a country. We emphasize the case where factors do not move from one country to another, i.e. where there is no international labor migration or international in-
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4.1 Technology Each sector has constant returns to scale. This assumption implies that (i) the PPF is concave, (ii) the output expansion paths are rays from origin, as illustrated in figure 1, (iii) the average cost of production is independent of the scale of output. To demonstrate (i) take two points on the PPF (not shown), a and b . The tangency at each point gives the relative price for which that point maximizes the value of output. You can show that any point on the line segment between these two arbitrary points, i.e., a convex combination of a and b ,isfeas ib le
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This note was uploaded on 08/01/2008 for the course ARE 201 taught by Professor Karp during the Fall '07 term at University of California, Berkeley.

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chapter4 - L Karp International Trade November 23, 2007 4...

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