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Heckscher-Ohlin - ECO 364 Topic 4 The Heckscher-Ohlin Model...

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ECO 364 - Topic 4 The Heckscher-Ohlin Model Kunal Dasgupta Dasgupta (UofT) HO model 1 / 36
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Road map 1 Motivation 2 The Model 3 Trade and factor prices 4 Evidence Dasgupta (UofT) HO model 2 / 36
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Motivation The Ricardian model emphasized differences in technology across countries as the reason why countries should engage in trade. But countries with similar technologies also trade a lot with each other. In some of these cases, trade seems to be driven by differences in resources. For example, Canada, which has a large endowment of land, exports forestry products to other developed nations while Japan, which has a large endowment of skilled labor, exports advanced manufactured goods. Dasgupta (UofT) HO model 3 / 36
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Motivation In the 1920s, Swedish economists Eli Heckscher and Bertil Ohlin developed an alternative to the Ricardian trade model. They assumed away with technological differences across countries and instead used the uneven distribution of resources across countries to explain trade patterns. One could think of the specific-factors model as the short run version of the Heckscher-Ohlin model. Dasgupta (UofT) HO model 4 / 36
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The Model Basics Two countries - Home and Foreign Two goods - Computers (C) and Shoes (S) Two factors - Capital (K) and Labor (L) Full employment in Home implies that K C + K S = ¯ K . L C + L S = ¯ L . Full employment in Foreign implies that K * C + K * S = ¯ K * . L * C + L * S = ¯ L * . Dasgupta (UofT) HO model 5 / 36
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The Model Assumptions Factors are freely mobile across sectors within a country, but not across countries. Shoe production is labor intensive, i.e., for a given wage-rental ratio, L S / K S > L C / K C . Home is capital abundant, i.e., ¯ K / ¯ L > ¯ K * / ¯ L * . The technology for producing both goods is the same in the two countries. Consumers in both countries have identical tastes, which is independent of their level of income. Dasgupta (UofT) HO model 6 / 36
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The Model Autarky Dasgupta (UofT) HO model 7 / 36
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The Model Autarky Since Foreign country is labor-abundant and shoe production is labor-intensive, the autarky relative price of shoe is lower in Foreign. = Foreign country has comparative advantage in the production of shoes. Reflects the fact that Foreign country’s resources are better suited to the production of shoes. Similarly, Home country has comparative advantage in the production of computers. Dasgupta (UofT) HO model 8 / 36
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The Model Trade Difference in autarky relative price of computers create opportunity for trade. Home export supply of computers. Foreign import demand for computers. Dasgupta (UofT) HO model 9 / 36
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The Model Trade Home export supply of computers Dasgupta (UofT) HO model 10 / 36
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The Model Trade Foreign import demand for computers Dasgupta (UofT) HO model 11 / 36
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The Model Trade equilibrium Dasgupta (UofT) HO model 12 / 36
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The Model Pattern of Trade Heckscher-Ohlin (HO) Theorem : With two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance and will import the other good.
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