Economia

The Heckscher-Ohlin Model

Appleyard & Field (& Cobb): Chapters 8 & 9
(Krugman & Obstfeld: Chapter 3 & 4)

1

Assumptions of the Heckscher-Ohlin(Samuelson)-Model
1. 2. 3. 4. 5. 6. 7.
o

Two countries, two (homogeneous) goods and two (homogeneous) factors of production Identical technology, different factor endowments Constant returns to scale Different factor intensities in productionFactors perfectly mobile inside each country and immobile between the countries Identical preferences among everyone Perfect competition in all markets No transportations costs
(price of labour) w = MPPL*P, (price of capital) r = MPPK*P
2

8.

Factor Endowments
• Countries differ in their relative factor endowments
•

Notation: K=capital, L=labour, r=price of capital, w=price of labour• Physical definition: (K/L)1 > (K/L)2

country 1 is capital-abundant (labour-scarce), country 2 is labourabundant (capital-scarce) • Price definition: (r/w)1 < (r/w)2 country 1 is capital-abundant, country 2 is labour-abundant • Given assumptions of perfect competition + identical technology and preferences, the physical and price definitions are identical
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Commodity Factor Intensity• Good X is capital-

relative factor prices (r/w) the firm always maximizes profits / minimizes cost by using relatively more capital in producing X than in producing Y

intensive and good Y labour-intensive if KX/LX > KY/LY for all

Capital Isoquant for X

Isoquant for Y

Labour
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Gains from Trade in the HecksherOhlin Model
Capital Intensive Good (e.g. paper)
(PC/PP)FA >(PC/PP)FT > (PC/PP)CA

(PC/PP)FA

(PC/PP)CA

(PC/PP)FT

trade

trade

Labour intenstive Good (e.g clothes)

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Heckscher-Ohlin Theorem
Country will export the commodity that uses relatively intensively its relatively abundant factor of production
• i.e. what we saw in the previous graph • example: China is labour-abundant and Finland is capital-abundant i.e. (K/L)C < (K/L)F and (r/w)C> (r/w)F

→ China exports labour-intensive products (e.g. clothes) to Finland and imports capital-intensive products (e.g. paper) from Finland
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Factor Price Equalization
• Autarky → Free trade o relative prices of final goods become identical
relative price of paper increases (=relative price of clothes decrease) in Finland

→ Finland produces more paper, China more clothes • Sinceproducing paper is more capital intensive, demand for capital increases and demand for labour decreases in Finland → w ↓ r ↑ • Similarly in China, demand for labour increases and demand for capital decreases → r ↓ w ↑ • In equilibrium all prices (including factor prices) are identical
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Factor Price Adjustments
Finland
r r SK rCA rFFT rCFT r FA DK K w w K DK SK

China

capital marketslabour markets

SL wFA wFFT DL

SL

wCFT wCA DL K
8

L

Income Distribution and Trade: the Stolper-Samuelson Theorem
• Trade affects both the prices of goods and the prices

of factors of production: What then is the impact of trade on distribution of real income?
o

wages decrease in Finland, but also the price of clothes decreases (i.e. you need less money to buy the sameamount of clothes). Which effect dominates?

• Stolper-Samuelson Theorem: real income of the

owners of abundant factor increases and the real income of owners of scarce factor decreases
o

Think about the labour abundant country (e.g. China): Free trade → r ↓ w ↑ → capital/labour ratio ↑ → labour productivity ↑ → real wages ↑

9

W. Stolper & P. Samuelson (1941): International Factor-PriceEqualisation Once Again. Economic Journal 59, no. 234.

Why Don’t We Observe Price Equalization?
• In reality most of the assumptions needed for price

equalization do not hold
o

e.g. imperfect competition, transportation costs, tariffs, subsidies, unemployed resources, technological differences, externalities…

• However, the model provides an important insight on

the tendency of...