Heckscher - proportions account for comparative cost...

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Heckscher-Olin Theory International trade occurs because of differences in opportunity costs, that is, from different shaped PPC's. International differences in the shape of PPC's result from 1. different goods use factors of production in different ratios 2. nations differ in their relative factor endowments The Heckscher-Olin Theory argues that factor proportions explain a nation's trade patterns. Countries export the products that use their abundant factors intensively and import the products that use their scarce factors intensively. A country is labor abundant if it has a higher ratio of labor to other factors of production than does the rest of the world. A product is labor intensive if labor costs are a greater share of its value than they are of the value of other products. Suppose 2 bushels of wheat = 1 bolt of cloth in the U.S. and 1 bushel of wheat = 1 bolt of cloth in the rest of the world. Wheat is relatively cheap in the U.S. H-O presumes that factor
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Unformatted text preview: proportions account for comparative cost differentials. So, the U.S. has relatively more of the factors that wheat uses intensively and relatively less of the factors that cloth uses intensively than does the rest of the world. Suppose land is the factor wheat uses intensively and labor is the factor cloth us es intensively. In other words, the U.S. must be land abundant. U.S. land supply R.O.W. land supply---------------- > ------------------U.S. labor supply R.O.W. labor supply implications: 1. U.S. should export wheat and import cloth 2. land should be relatively cheap in the U.S. and labor should receive a relatively higher wage in the U.S. than elsewhere H-O theory explains general trade patterns relatively well, but recent trends indicate that the industrial countries are becoming more similar in their factor endowments. So, the H-O theory may become less relevant....
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