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I 87 Trade and Resources: The Heckscher-Ohlin Model God did not bestow all products upon all parts of the earth, but distributed His gifts over different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so He called commerce into being, that all men might be able to have com- mon enjoyment of the fruits of the earth, no matter where produced. Libanius (AD 314–393), Orations (III) Nature, by giving a diversity of geniuses, climates, and soils, to different nations, has secured their mutual intercourse and commerce. . . . The industry of the nations, from whom they import, re- ceives encouragement: Their own is also [i]ncreased, by the sale of the commodities which they give in exchange. David Hume, Essays, Moral, Political, and Literary, 1752, Part II, Essay VI, “On the Jealousy of Trade” 1 Heckscher-Ohlin Model 2 Testing the Heckscher-Ohlin Model 3 Effects of Trade on Factor Prices 4 Conclusions Appendix to Chapter 4: The Sign Test in the Heckscher-Ohlin Model n Chapter 2, we examined U.S. imports of snowboards. We argued there that the resources found in a country would influence its pattern of international trade. Canada’s export of snowboards to the United States reflects its mountains and cold climate, as do the exports of snowboards to the United States from Austria, Spain, France, Bul- garia, and Switzerland. Because each country’s resources are different and because re- sources are spread unevenly around the world, countries have a reason to trade the goods made with these resources. This is an old idea, as shown by the quotations at the beginning of this chapter; the first is from the fourth-century Greek scholar Libanius, and the second is from the eighteenth-century philosopher David Hume. In this chapter, we outline the Heckscher-Ohlin model, a model that assumes that trade occurs because countries have different resources. This model contrasts with the Ricardian model, which assumed that trade occurs because countries use their techno- logical comparative advantage to specialize in the production of different goods. The model is named after the Swedish economists Eli Heckscher, who wrote about his views 4 FeenTayTrade2e_CH04_Layout 1 8/7/10 1:45 PM Page 87
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of international trade in a 1919 article, and his student Bertil Ohlin, who further de- veloped these ideas in his 1924 dissertation. The Heckscher-Ohlin model was developed at the end of a “golden age” of inter- national trade (as described in Chapter 1) that lasted from about 1890 until 1914, when World War I started. Those years saw dramatic improvements in transportation: the steamship and the railroad allowed for a great increase in the amount of international trade. For these reasons, there was a considerable increase in the ratio of trade to GDP between 1890 and 1914. It is not surprising, then, that Heckscher and Ohlin would want to explain the large increase in trade that they had witnessed in their own lifetimes.
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