international economic relations econ 548 summer 2007 william j. polley department of economics...
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International Economic RelationsEcon 548 Summer 2007
William J. PolleyDepartment of Economics
College of Business and TechnologyWestern Illinois University
Trade theory through the years…
Mercantilism Adam Smith David Ricardo
Comparative advantage Heckscher-Ohlin Theorem More recent developments
Heckscher-Ohlin
Assumptions 2 countries, 2 goods (sectors), 2 factors Factors are in fixed amounts, mobile across
sectors, immobile across countries Identical consumer tastes and production
technologies Constant returns to scale
Heckscher-Ohlin
Theorem: A country has a comparative advantage in the good that makes relatively intensive use of the relatively abundant factor.
Factor Price Equalization
Under HO assumptions, free trade induces equalization of wages and capital rental rates across countries.
Stolper-Samuelson Theorem
An increase in the price of the labor intensive good will increase the wage relative to the prices of both goods and reduce the capital rental rate relative to the prices of both goods.
The reverse is also true.
Rybczynski Theorem
Given prices, an increase in labor will increase output of the labor intensive good more than proportionally and reduce the output of the capital intensive good.
Similarly for an increase in capital.
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