1 / 12

Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model)

Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model). The Explanation of International Trade: Differences across countries in relative abundance of factors of production. Assumptions: Identical Technologies Identical Demand Patterns. Factor Intensity.

blake
Download Presentation

Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model) The Explanation of International Trade: Differences across countries in relative abundance of factors of production. Assumptions: Identical Technologies Identical Demand Patterns

  2. Factor Intensity : Full employment Y K constant A B B’ L constant C D X Structural Bias: The Transformation Curve( = ABC) shifts asymmetrically with unbalanced changes in K and L. A Rise in K, with no change in L, leads to an increase(fall) in X (Y)).

  3. AT POINT C 1) Labor is unemployed: W=0. (2) X-industry is active Y-industry is inactive. Therefore: AT POINT A 1) Capital is unemployed: R=0. (2) Y-industry is active X-industry is inactive. Therefore:

  4. AT Point A(continue):

  5. At Point B Relative Supply

  6. The Bias in Relative SupplyTwo Countries: H and F (H is more capital abundant)

  7. Free Trade and Autarkic Equilibria 3 2 1 2=Free trade 1=autarky in H 3=autarky in F

  8. Full Employment Supply of X and Y:

  9. Heckscher-Ohlin Proposition #1: The country exports the good which is intensive in the use of the factor with relative abundance.

  10. Full Employment Factor Prices:

  11. Income Distribution and International Trade W A Industry X-Line B B’ Industry Y-Line C D R ABC=factor price frontier A rise in (X is capital intensive) will raise R and decrease W.

  12. Heckscher-Ohlin Proposition #2(dual to Proposition #1): Free trade causes an increase in the factor price of the factor of production which is used intensively in the export industry and a fall in the factor price used intensively in the import competing industry.

More Related