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1
H-O Model
The Heckscher-Ohlin 2
Model Empirical
Evidence
3
Conclusions
Introduction
Generalizations
Many factors and goods
Differing productivities
Figure 4.1
APPLICATION
As part of our assumptions, we assume that factor
intensities in each industry are the same in both
countries.
E.g. shoes are labor intensive in both countries
APPLICATION
Asian production uses old technology and workers earn
relatively little compared to the U.S.
Labor intensive in Asia.
Indifference Curves
Consumer tastes are the same across countries, so the
shape of the indifference curves is the same in each country.
Foreign specializes
further in shoes and
produces fewer
computers.
B* is where Foreign
produces and C* is
where Foreign
consumes.
It is downward-sloping
since at higher relative
prices, Foreign is willing
to specialize further in
shoes and import more
computers.
This is a free-trade
equilibrium since there is no
reason for the relative price
to change.
L LC LS LC K C LS K S
K K KC K KS K
Relative Supply Relative Demand
Figure 4.8
2008 Worth Publishers International Economics Feenstra/Taylor 31 of 113
Effects of Trade on Factor Prices
How does this happen?
More labor per unit of capital is released from shoes than is
needed to operate that capital in computers.
As the relative price of computers rises, computer output
rises while shoe output falls.
Labor is freed up to be used more in both industries.
L LC KC LS K S
K KC K K S K
Rearranging
MPLC = W/PC and MPLS = W/PS
A Numerical Example
Suppose we have the following data:
R PC PC QC W W LC
Rewrite the last
R PC R KC W R KC
equation in
percentage R W W LS
changes: R W R K S
R 100 W 50
10%
Plugging in data R 50 W 50
from before:
R W 60
R W 40
APPLICATION
A survey was conducted in the U.S. by the
National Elections Studies (NES) in 1992 to see
how citizens viewed trade.
Respondents could either answer that they favor
placing limits on imports, not supporting free trade, or
they could oppose limits on imports, supporting free
trade.
How do these answers compare with characteristics of
the respondents, such as their wages, skills, or the
industries they work in?
APPLICATION
If labor earns some of the return to capital, then workers in
exporting (importing) industries will support (oppose) free
trade.
APPLICATION
In the NES survey, the industry of employment was
somewhat important in explaining respondents attitudes
toward free trade, but skill level was much more important.
Workers in export-oriented industries are somewhat more likely to
favor free trade.
Those in import-competing industries favoring import restrictions.
APPLICATION
Respondents were also asked if they owned a home.
People who owned homes in communities where the local
industries face a lot of import competition are much more
likely to oppose free trade.
People who owned homes in communities where the
industries benefit from export opportunities are more likely
to support free trade.
People are concerned about the asset value of their
homes, just like the owners of specific-factors in our model
are concerned about the rental earned by the factor of
production they own.
HEADLINES
It is expected that by about 2010, U.S. imports of
agricultural goods will be about equal to exports.
The sign test seems to fail for the U.S. in 1947 in labor.
Figure 4.11
APPLICATION
From the 17th century until the early 19th century, India was
a major world producer of cotton textiles and exported
those goods to Britain and elsewhere.
By the early 19th century, however, Britain had overtaken
India as the worlds dominant producer of cotton textiles
and was exporting to India.
India still produced raw cotton needed to manufacture
cotton cloththe raw cotton was exported to Britain.
A similar trade pattern held for China and Egypt.
APPLICATION
These countries are all labor abundant rather than land
abundant, therefore it is puzzling why they seem to be net
exporters of land and net importers of labor.
Two explanations
1. Britains rise as the worlds leading exporter of cotton
textiles was related to technological improvements.
However India was able to gain access to this technology.
Then the importing of textiles is contrary to the HO model.
APPLICATION
2. The poor countries used this new technology
to make textiles inefficiently.
Large differences in efficient use of technology across countries remained. .
This inefficiency applied more strongly to labor than it did to
other factors such as land.
Estimates from 1910 and 1990 show that labor was not
necessarily the abundant factor in India once we take into
account its low productivity.
India could be considered land-abundant if land and labor
are measured by their effective amounts.
This can explain the switch from exporter to importer.