h-o theory

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Trade Patterns:

Heckscher-Ohlin (H-O)

Factor Proportions Theory

Econ 303

International EconomicsSSU

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Production of cloth under constant

opportunity cost

W

heat,bushels

Wheat,b

ushels

Bushels/y

ard

Cloth, yards Cloth, yards

Cloth, yards Cloth, yardsCloth, yards

US Rest of the World

S

Bushels/y

ard

S

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Deriving supply curves under increasing

opportunity costs

Wh

eat,b

ushels

Bushels/y

ard

Cloth, yards

Cloth, yards

S

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Comparative advantages under increasing

opportunity cost

W

heat,bushels

Wheat,b

ushels

Bushels/y

ard




Srw

Bushels/y

ard

Sus

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Deriving demand curves from

indifference curves

Wh

eat,b

ushels

Bushels/y

ard

Cloth, yards

D

Better

Cloth, yards

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Production Possibility & Indifference Curves

Wh

eat,b

ushels

Bushels/y

ard

Cloth, yards

D

Cloth, yards

S

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Demand as a source of trade

D

S

D

S

p

ri

ce

wine

Rest of the WorldUSA

X

M

International Market

winewine

pr

ice

pr

ice

D

X

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Explaining Trade Patterns

Classics:

Trade is supply driven

Constant return to scale

One factor of production: labor

Constant productivity of labor

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A More Complete Explanation

Production differences (then supply) matters

Consumption differences (then demand)

matters

Market Structures (competition vs. monopoly

matters)

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Neo-Classical:

Trade is supply and demand driven

But, supply still is the determinant factor

Decreasing returns to scale

Many factors of production: labor, capital +

Decreasing marginal productivity

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Heckscher-Ohlin (H-O) Assumptions

Both countries have access to same technologies

Two production sectors One is more labor intensive than the other sector

The other sector is more capital (or land) intensive

Two or more production factors

Similar production functions

Decreasing marginal productivities for each factor (others fixed) Decreasing returns to scale for all factors (all variable)

Both countries have the same preferences

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Heckscher-Ohlin (H-O) Assumptions (cont)

But each country has different factorproportions:

Example: One country is more labor abundant than

the other

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Heckscher-Ohlin (H-O) Propositions

A country will choose to produce more in the

sector which is more intensive in the factor thatis more abundant.

Abundance is a relative concept: relativelyabundant

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Heckscher-Ohlin (H-O) Countries export the products that use their

abundant factors intensively (and import the

products that use their scarce factors intensively). With no trade the relatively abundant production

factors will be relatively cheap, so that the product

that uses these factors relatively intensively will

have a low no-trade price. As trade is opened, thisproduct is exported.

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Resource Endowment and Domestic

Production Pattern: Equal Case

Wheat,b us

hels

Wheat,b us

hels

Cloth, yards

Cloth, yards

USRest of the World

Capital

Labor

Capital

Labor

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Production and Consumption

Supply and Demand: Equal Case

W

heat,bushels

Whea

t,b

ushels

Bushels/y

ard




Srw

Bushels/y

ardS

us

Dus Drw

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Resource Endowment and Domestic Production

Pattern : Different Factor Proportions

Wheat,b us

hels

Wheat,b us

hels

Cloth, yards

Cloth, yards

USRest of the World

Capital

Labor

Capital

Labor

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Supply and Demand under Different Factor

Proportions: International Trade

W

heat,bushels

Whea

t,b

ushels

Bushels/y

ard




Srw

Bushels/y

ard

Sus

M

X

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This is the Heckscher-Ohlin

theorem:

Each country exports the good intensive

in the country's abundant factor.

h-o theory

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