CH4 HO Model student - ECO369 International Economic Issues...

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ECO369 International Economic Issues Lecture Outline GVSU, Wei Sun Chapter 4. Heckscher-Ohlin Model I. Assumptions for the Heckscher-Ohlin Model 1
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II. Autarky Solution Suppose that country A is relatively capital abundant and country B is relatively labor abundant. Soybean industry is relatively capital-intensive, and textile industry is relatively labor-intensive. In Autarky, which country has a comparative advantage in producing S? Which country has a comparative advantage in producing T? What does this imply for the relative prices (P S /P T ) in autarky in the two countries? Illustrate it in the graph. 2
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III. Trade Solution The Heckscher-Ohlin Theorem In Trade, which country will export which good? A. Trade Equilibrium Country A Country B Autarky Comparative Advantage in RP of S Trade RP of S Production of S Production of T B. Graphical Illustration The TOT (terms of trade) must be at some level between the two autarky relative prices (RP A and RP B ) at which trade is balanced between the two countries. Graphically, the two trade triangles must be identical.
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