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3_3150_ho07 - 3.Heckscher-Ohlin Mode of Trade...

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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 1 Heckscher-Ohlin Model 1. Setup 2. Autarky Equilibrium 3. Free Trade Equilibrium 4. The Heckscher-Ohlin Theorem 5. The Factor-Price-Equalization Theorem 6. The Stolper-Samuelson Theorem 7. The Rybczynski Theorem
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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 2 Problems with Ricardian model: 1. It predicts complete specialization 2. It predicts that all workers will gain from free trade. In real life some workers oppose free trade. (E.g. U.S. steel workers oppose free trade with China)
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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 3 Heckscher-Ohlin Model: 2 factors: capital (K) and labour (L) => concave production frontier => no complete specialization, in equilibrium each country produces both goods Comparative advantage is based on national differences in factor endowments. Countries have different factors endowments (e.g. capital, labour (skilled or unskilled), land etc.) Differences in relative factor endowments result in differences in autarky prices. E.g. countries that have relatively abundant supplies of agricultural land (like Canada, USA) have cheaper autarky prices of agricultural products and become exporters of agricultural products. The model predicts that trade leads to redistribution of income between capital and labour => explains opposition to trade of some factors of production This model is favoured by economists and is supported by the real world data. There is a great deal of evidence that differences in factor endowments are important in explaining trade patterns.
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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 4 1. Setup 2 goods: X,Y 2 factors: K,L, capital gets rent r , labour gets wage w 2 countries: H,F Assumptions 1. Identical CRS production functions in H and F 2. K h , L h , K f , L f - fixed factor endowments factors are perfectly mobile within each country between X and Y sectors; factors are immobile between countries. 3. H, F differ in relative factor endowments. (This will give rise to price differences in H and F.) 4. Consumers in H, F have identical, homogenous preferences 5. No distortions (tariffs etc.)
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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 5 Definition Factor Endowments If capital- labor ratio in country H is greater than it is in country F ( f f h h L K L K > ), then country H is relatively capital- abundant and labour-scarce, while country F is relatively labour-abundant and capital-scarce. Example K stock ($b.) L (m) L K ($) Brazil 507 53 9, 566 US 3,696 116 32,421 Switzerland 120 3 40,000 => U.S. is capital-abundant relative to Brazil, but capital- scarce relative to Switzerland.
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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 6 L K h K f K h L f L h E f E slope=home capital-labour ratio slope=foreign capital-labour ratio A. Factor Endowments Graph H is capital-abundant, F is labour-abundant
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3.Heckscher-Ohlin Mode of Trade Econ 3150 York U 7 Definition Factor Intensities Good Y is relatively capital-intensive and good X is relatively labour-intensive if the capital-labour ratio used in production of good Y is higher: x x y y L K L K > Example K $m L thousands L K , $
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