Chapter 4 – The HeckscherOhlin Model
The classical model has several shortcomings:
1. Makes unrealistic predictions like complete specialization that are not consistent with the
realworld.
Complete specialization results from constant opportunity cost assumption, can be
modified with increasing opportunity cost assumption.
2. Classical model doesn’t explain why differences in productivity exist.
3. Classical model doesn’t explain why
most
trade takes place among countries with
similar
levels of economic development.
In the early 1900s, two Swedish economists (Heckscher and his student Ohlin) extended the
classical model for international trade and developed a much richer model, the
HO Model.
HO Insights:
a. Countries differ in their
factors endowments
, or factors of production: quantity and quality of
labor, land, capital, machinery, and natural resources.
b. Goods differ according to the factors required in production, e.g., soybeans are “land
intensive” and textiles are “laborintensive.”
c. Countries will have a comparative advantage, and will therefore produce goods, whose
production requires relatively
large
amounts of the factors with which it is relatively
well
endowed.
Countries with lots of farmland will produce goods that require large amounts of land for
efficient production (wheat, soybeans, corn).
HO is appealing for its simplicity yet completeness, and its versatility.
HO MODEL: BASIC ASSUMPTIONS
Economic theory/models: a) Make assumptions, b) Solve model, c) Perform experiments.
We maintain Assumptions 110, and drop 11 and 12 (labor only) because we add other factors
(capital, machinery), and we add 5 new assumptions.
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentAssumption 13
:
2 factors of production, L (paid wage W) and K (rental payment R).
Now the
ratio of K/L or L/K becomes important for trade patterns, and will change as relative factor
prices change (W/R).
Assumption 14
:
Technology is identical in each country.
For any good (T), producers in both
countries have access to the same production techniques, but will vary based on factor prices
(W, R) in each country.
If labor is relatively cheap in A, producers will use more labor
intensive methods of production.
If factor prices are the same in both countries, the same
production processes (K/L) will prevail in both countries.
Assumption 15
:
Production of T always requires more labor per machine than S, i.e., the L/K
ratio is higher for T than for S.
Also, we continue to assume constant returns to scale for
both
goods in
both
countries (double inputs, double output).
Producing T is more
labor intensive
than S, and producing S is more
capitalintensive
than T,
so the amount of labor per machine (L/K) is higher for T than for S (Equation a below) and the
amount of capital investment per worker is higher for S than for T (Equation b).
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 STAFF
 Opportunity Cost, International Trade

Click to edit the document details