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06 Heckscher-Ohlin Model, Part 1

06 Heckscher-Ohlin Model, Part 1 - Heckscher-Ohlin Model...

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1 1 Heckscher-Ohlin Model, Part 1 • Agenda – A Two-Factor Autarky Economy. – Production Possibilities – Goods Prices – Factor Prices and Factor Levels – Goods Prices, Factor Prices, and Factor Levels 2 A Two-Factor Autarky Economy • Assumptions: – Only 2 countries: Home and Foreign. Both countries’ economies are characterized by profit maximization and perfect competition. – Only 2 goods: Cloth, C, and Food, F. 3 A Two-Factor Autarky Economy • Assumptions: – Only 2 factors of production: Land, T, and Labor, L. Factors of production are constant within each country. Factors of production vary between countries. 4 A Two-Factor Autarky Economy • Assumptions: – Competition allows the factors of production to be paid a “competitive” return. A function of their productivities and the price of the good that they produce.
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