The_Heckscher-Ohlin_Model__Lesson_26_

The_Heckscher-Ohlin_Model__Lesson_26_ - The Mystery of the...

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1 Lesson 26 1 The Mystery of the Missing Trade In addition to predicting the pattern of trade, the formal H-O model also predicts the volume of trade Daniel Trefler (1995) was the first to note that the actual volume of trade is far less than that predicted by the model Lesson 26 2 The basic idea One of the assumptions of the H-O model is that “demand conditions are the same in all countries” The assumption is actually more technical than this Lesson 26 3 In particular, the assumption can be stated in the following way: When faced with the same set of relative prices, all people would choose to spend their income in the same way e.g., suppose that Bill Gates (one of the world’s wealthiest individuals) and I face the same set of relative prices
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2 Lesson 26 4 If we have the same preferences, we would each allocate the same share of out income to housing, the same share to food, the same share to entertainment, and so on Suppose we each spend half of our income on housing, one third of our income on food, and one sixth on entertainment Lesson 26 5 Assuming that Bill’s income is 1,000 times
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The_Heckscher-Ohlin_Model__Lesson_26_ - The Mystery of the...

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