ch05 - Chapter Five: Factor Endowments and the...

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Chapter Five: Factor Endowments and the Heckscher-Ohlin Theory
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5.2 Assumptions of the Theory A. The Assumptions 1) There are two nations (1&2), two commodities Used to illustrate the theory in a two-dimensional figure. 2) Both nations use the same technology in production. Means both nations have access to and use the same general production techniques. 3) Commodity X is labor intensive and Y is capital intensive in both nations. Means the labor-capital ratio (L/K) is higher for X than Y in both nations at the same relative factor prices.
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4) Both commodities are produced under constant returns to scale in both nations. Means that increasing the amount of L and K will increase output in the same proportion 5) There is incomplete specialization in production in both nations. Means that even with free trade both nations continue to produce both commodities. This implies neither nation is very small. 6) Tastes are equal in both nations. Means demand preferences are identical in both nations. When relative prices are equal in the two nations, both consume X&Y in the same proportion.
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7) There is perfect competition in both commodities and factor markets in both nations. Means that producers, consumers, and traders of X&Y in both nations are each too small to affect prices of commodities. Also, in the L-R commodity prices equal their costs, leaving no economic profit. 8) There is perfect factor mobility within each nation but no international factor mobility. Means K&L are free to move from areas and industries of lower earnings to those of higher earnings until earnings are the same in all areas, uses and industries of the nation. International differences in earnings persist due to zero international factor mobility in the absence of international trade.
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9) There are no transportation costs, tariffs, or other obstructions to the free flow of international trade. Means specialization in production proceeds until relative (and absolute) commodity prices are the same in both nations with trade. If transportation costs and tariffs were allowed, specialization would proceed only until prices differed by no more than the costs and tariffs on each until of the commodity traded.
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10) All resources are fully employed in both nations. Means there are no unemployed resources in either nation. 11)International trade between the two nations is balanced. Means that the total value of each nation’s exports equals the total value of the nation’s imports.
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Table: Factor Endowments of Leading Industrial Countries, as a Percentage of the World Total in 1980* Semi- All Physical R&D Skilled Skilled Unskilled Arable Resources Country Capital Scientists Labor Labor Labor Land (1982 GDP) ountry CapitalScientistsLabor Labor Labor Land (1982 GDP) U.S. 33.6% 50.7%
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ch05 - Chapter Five: Factor Endowments and the...

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