The Heckscher-Ohlin model Sources: Mucchielli Mayer; Feenstra Taylor.
Eleni ILIOPULOS Paris 1
Class 6
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Aim of this lecture
Understand the Heckscher-Ohlin Model. Understand how the HO Model contrasts with the Ricardian model. Understand the No-Trade and the Free Trade equilibrium of the HO model. Understand the e¤ects of trade on factor prices. Understand how we can extend the Heckscher-Ohlin model. References: Mucchielli Mayer (2005); Feenstra Taylor (2008).
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The model: basic assumptions Two countries: H, F Two goods: X, Y Two (homogeneous) factors: L, K Identical technologies in H and F for each good (but techX6=techY, of course!). K Factor intensities di¤er from sector to sector: KLxx 6= Lyy .For instance, K
we suppose here KLxx > Lyy CRS No distortions to production and/or to perfect competition. Production factors are fully employed. Perfect factor mobility across sectors; however, factors do not cross borders. Identical and homogeneous preferences (same indi¤erence curves). Di¤erent factors endowments! KL h 6= KL f . For instance, we suppose here KL h > KL f
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Specialization?
K
Since KLxx 6= Lyy and KL h 6= KL f , countries have an incentive to produce the good that is intensive in the domestically abundant factor! Factor intensities: result of producers optimization program, for a given wr Technical coe¢ cients can vary: aLx = Lx /X for a given wr . If ∆ wr ! producers optimize and can change factor intensities (NB: factors can be substituted!) However, irreversibility of factor intensities among sectors (i.e., Ky Kx Lx > Ly )
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Equilibrium in autharky
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Indi¤erence Curves
Consumer tastes are the same across countries, so the shape of the indi¤erence curves is the same in each country. The tangencies with the two countries’PPFs are di¤erent because of the di¤erent shapes of the PPFs. The relative price that consumers are willing to pay for computers equals the opportunity cost of producing them — the no trade equilibrium. The slope at tangency equals the relative price of computers — the steeper the slope, the higher the relative price of computers.
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Properties of autharky equilibrium: comparative advantage Kx Lx
>
Ky Ly
and
K L h
>
K L f
entail:
Home PPF biased in favor of X (computers) Foreign PPF biased in favor of Y (shoes). Identical preferences in H and F ! the indi¤erence curves of both countries are parallel! a
a
< PPyx Therefore, since PPFs are biased: PPyx h f ! country H has a comparative advantage in producing X . !Comparative advantage: determined by factors endowments and factor intensities. What if the size of country H changes? Comparative advantage is not a¤ected if KL h stay …xed.
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Trade equilibrium with di¤erent autharky prices
relative prices are equalized. relative prices allow markets to clear consumers are on higher indi¤erence curves Incomplete specialization (see the following slides)
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Country H
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International market for Home, good X
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Country F
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International market for Foreign, good X
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International equilibrium for the good X
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Equilibrium Price with Free Trade
The equilibrium free trade price is determined by the intersection of the Home export supply curve and the foreign import demand curve: Point D. At that relative price, the quantity that Home wants to export equals the amount that Foreign wants to import. This is a free-trade equilibrium since there is no reason for the relative price to change. The trade triangles of the two countries are identical in size. Heckscher-Ohlin Theorem: With two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance, and will import the other good.
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Factors and prices: what happens if the relative price increase?
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Factors and prices: what happens if the relative price increase?
Sector Y frees some L and K but in a proportion such that: Kx K w L free < L x – for an initial r In order to absorb the additional labor (and substitute capital): More precisely, if the (relative) price of one good increases, the income of the factor which is used intensively in its production increases as well.
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w r
#
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Factors income
w r b
wf rf
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Empirical relevance: In reality, factors incomes are not equalized. Are the assumptions of the H-O-S theorem veri…ed?
Transportation costs do not allow to equalize good prices Tari¤s do not allow to equalize good prices Distortions that a¤ect perfect competition do not allow to equalize good prices Do countries have the same technology? Do factors have the same productivity all around the world?
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The Stopler-Samuelson Theorem Under the above assumptions, an increase of the relative price of one good increases the real income of the factor intensively used in its production; it also entails a decrease in the real income of the other factor. Factors endowments are assumed to be …xed. Ampli…cation e¤ect: the increase in the real income of the factor (i.e., r w ) is greater than the one of the relative price of the factor-abundant Px good (i.e., Py ). Redistribution as an important issue for policy makers: is it better to let r or w increase? It follows from scarcity vs abundance of factors. If the production of one good cannot change (i.e., the country is completely specialized), the real income of factors cannot vary.
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The Theorem of Rybczynski
If the relative price of goods is …xed and countries are not completely specialized, the increase of the endowment of a factor entails an increase in the production of the good, which is intensive in that factor; it also entails a reduction in the production of the other good – the one intensive in the other factor. Ampli…cation e¤ect: the increase of the quantity of the good is greater than the increase in the quantity of the factor.
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The growth of a factor in a country and terms of trade If growth is biased in favor of the export sector ( KLxx ") and H is a large country ! excess supply of X! Relative price of X decreases ( PPyx #) ! ToT deteriorate!
On the contrary, if growth is biased in favor of the import sector: ToT improve! Bhagwati (1985) stresses that developing countries may not bene…t of factors growth in open economy. Small open economy: factors’growth does not have e¤ect on ToT. Factor growth cannot but be bene…cial If factors increase a lot you can have an inversion of specialization
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Empirical relevance: the paradox of Leontief
a=
Kimp /Limp Kexp /Lexp
if the country is abundant in capital, a < 1. Is it the case? No.. (other tests have better results...still, they are not conclusive). Why? Land and natural resources are not accounted as production factors Tari¤s can bias results The year the test was done was close to the end of IIWW (data are biased) What if we account for labor productivity? (the possible solution of Leontief)
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Empirical relevance: the paradox of Leontief The model Heckscher-Ohlin-Vanek (HOV): n factors, m goods and di¤erent countries. Focus on the service provided by factors (countries export the service provided by the abundant factor). In a two country framework (Vanek, 1968): if one country is abundant in one factor, it needs to be a net exporter of its services. Factor abundance: the share of a country’s factor in world amount of that factor OVER the country’s GDP share in world GDP. If specialization does not occur in more than n-m sectors and F1 f1
F1 f1
..
Fn fn
if free trade, then the Home country will export services F1 , F2 , Fj and import services Fj +1 , Fj +2 , Fn (j 6= n) ; we can compute j, if we know the prices of factors. Results improve little.. See your book (MM) for more and more discussion.. E. ILIOPULOS (Paris 1)
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Important corrections are needed (Tre‡er 1995; Davis et Weinstein, 2001..): Home bias in agents’preferences Di¤erent productivities (Ricardo?) Better data Transportation costs. Can H-O really explain intra-industry trade??
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The Stopler-Samuelson theorem and inequality in the North In the rich countries, the income gap between skilled and unskilled labor increases (or, where wages are not ‡exible, unemployment of unskilled workers increases). At the same time, unskilled-labor-intensive goods are imported from poorer countries. Is it because of the Stopler-Samuelson e¤ect? However: The share of manufactures coming from developing countries into OECD countries is still very small (but increasing). Does inequality come from a biased growth in favor of technological progress? However, even if international trade may contribute to inequality, protectionism is not the solution. E. ILIOPULOS (Paris 1)
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