Unformatted text preview: ) into (15.1), the latter can be written as 7
This can be re-arranged to yield
The trade balance condition: the sum of the value of exports over all goods i
plus the sum of the value of factor exports (the difference between each
factor’s endowment and use) over all factors j must equal zero
This can be rearranged to yield 8
Autarky market clearing condition is that the supply and demand of each
good are equal.
Substitute (15.7) for the left-hand side of (15.5) and substitute (15.8) for the
right-hand side of (15.5). The latter then becomes
Free trade consumption is revealed preferred to autarky consumption, which
was to be proved. Free trade in goods and factors in a competitive,
undistorted economy must be better than autarky. Factor trade and commodity trade as substitutes Heckscher-Ohlin Model 1. Factor prices are equalized by trade and there is no reason to add factor
trade to commodity trade. 2. Countries are sufficiently different such that they are specialized in
trade: then each country has a relatively high price for its scarce factor,
the factor used intensively in its import competing industry.
Figure 15.2 Figure 15.3 Allowing factors to move implies that relative factor endowment
differences will be reduced and in general trade will be reduced. 9 Figure 15.2: Specialization and Relative
Factor Prices Figure 15.3: Factor trade outside the FPE set
h spec in X2 an/or f in X1 K World Capital Endowment (w/r) h
X2 w/r Ef E
h spec in X 1 and/or f in X 2 (w/r) f Oh L World Labor Endowment 10
Trade in goods and factors are substitutes 3. Trade barriers prevent commodity prices from being equalized, and so
factor prices are not equalized. Each country has a relatively high price for its own import good, and
thus a relatively high price for its scarce factor (Stolper-Samuelson
theorem). Factor trade tends to equalize relative endowments and thereby reduce
or even eliminate trade. Trade in goods and factors are substitutes.
Figure 15.4 Figure 15.5 Figure 15.4: Trade Costs and
Factor Prices Figure 15.5: Factor trade with trade costs
Of X f2 X h2 Unit value
$1 of X 1 or X 2 (w/r) f World Capital Endowment h spec in X 2 an/or f in X 1 K E
Set h spec in X 1 and/or f in X 2 (w/r) Oh X f1
L World Labor Endowment 11
Factor Trade and Commodity Trade as Complements 1. Differences in technology: add Ricardo to Heckscher-Ohlin.
Suppose that country h has a superior technology in X1, the labor
But suppose that countries have equal relative endowments of both
labor and capital.
Country h will produce relatively more X1 in free-trade (in goods)
equilibrium. But this will bid up the price of labor in country h.
Then labor should flow to country h until all X1 is produced in country h.
Trade in goods will increase.
Figure 15.6 Figure 15.7 Figure 15.6: Country h has
technical advantage in X 1 Figure 15.7: Factor prices with
Oy X2 Endo...
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