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The_Heckscher-Ohlin_Model__Lesson_19_

# The_Heckscher-Ohlin_Model__Lesson_19_ - The H-O model...

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1 Lesson 19 1 The H-O model: Definitions, Assumptions, Implications In this lesson, we set up the Heckscher- Ohlin model of trade The main focus is on providing the vocabulary necessary to understand the model We end the lesson with four implications of the model, but reserve detailed proof of those implications for subsequent lessons Lesson 19 2 The H-O model has been the “workhorse” model of trade for much of the 20 th century First exposited by two Swedish economists, Eli Heckscher and Bertil Ohlin The model has many aliases, all of which refer to the same basic framework Lesson 19 3 Heckscher-Ohlin (H-O) model Heckscher-Ohlin-Samuelson (H-O-S) model Factor endowment model Factor proportions model 222 m o d e l ××

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2 Lesson 19 4 Assumptions Two countries (call them Home and Foreign) Two goods (call them X and Y ) Two inputs, or “factors of production” (call them K and L ) Lesson 19 5 Assumptions Inputs can easily move between sectors, but cannot move between countries Technology is characterized by constant returns to scale Both countries have access to the same technology for producing output Lesson 19 6 Assumptions All markets are perfectly competitive Demand conditions are the same in both countries (a technical assumption that rules out cross-country differences in preferences as a reason to trade)
3 Lesson 19 7 Describing technology: Because technology is characterized by constant returns to scale, we just need to know how much capital and labor are used to produce one unit of output in order to fully describe the technology Lesson 19 8 Describing technology: If we know how much of each input is used to produce a single unit of output, we know that if we double both inputs, we also double output, etc. Lesson 19 9 As in an earlier lesson, define the following terms amount of labor used to produce one unit of LX a X = amount of capital used to produce one unit of KX a X =

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4 Lesson 19 10 As in an earlier lesson, define the following terms amount of labor used to produce one unit of LY a Y = amount of capital used to produce one unit of KY a Y = Lesson 19 11 We can characterize a technology by the intensity with which it uses factors of production
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The_Heckscher-Ohlin_Model__Lesson_19_ - The H-O model...

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