Lecture9

# Lecture9 - The Hecksher-Ohlin model Trade and Factor Prices...

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The Hecksher-Ohlin model: Trade and Factor Prices Lecture 9 Chaper 4 Feenstra and Taylor

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Effect of Trade on Factor Prices We can use the relative demand for labor in each industry to derive an economy-wide relative demand for labor. We can then compare it to the economy-wide relative supply of labor, L/K. This will determine Home’s relative wage and what happens after the relative price of computers changes.
Effect of Trade on Factor Prices Economy-Wide Relative Demand for Labor Labor and capital used in each industry add up to the total available labor and capital. • K = K C + K S and L = L C + L S We can divide total labor by total capital to get the relative supply equal to the relative demand.

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+ = + = K K K L K K K L K L L K L S S S C C C S C Relative Supply Relative Demand
Effect of Trade on Factor Prices Relative demand= weighted average of the labor-capital ratio to each industry. – Weights for each industry are K C /K and K S /K. These are the shares of total capital employed in each industry. Equilibrium relative wage determined by the intersection of the relative supply (L/K) and the relative demand curves. Remember, we take the country endowments as given.

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Effects of Trade on Factor Prices The relative demand is an average of the labor curves for each industry. The relative demand curve therefore lies between these two curves. Where the curves intersect gives the wage relative to the rental: W/R. Point A describes an equilibrium in the labor and capital markets.
Effects of Trade on Factor Prices Figure 4.6

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• Increases in P C /P S at Home. Production shifts away from shoes to computers. Labor and capital both move from shoe production to computer production. Since capital has shifted to the computer industry, the relative demand for labor changes. • The terms used in the weighted average, K
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Lecture9 - The Hecksher-Ohlin model Trade and Factor Prices...

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