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1、Chapter 4Resources and Trade:The Heckscher-Ohlin ModelPrepared by Iordanis PetsasTo Accompany International Economics:Theory and PolicyInternational Economics:Theory and Policy,Sixth Editionby Paul R.Krugman and Maurice ObstfeldCopyright 2003 Pearson Education,Inc.1IntroductionA Model of a Two-Facto

2、r EconomyEffects of International Trade Between Two-Factor EconomiesEmpirical Evidence on the Heckscher-Ohlin ModelSummaryAppendix:Factor Prices,Goods Prices,and Input Choices Chapter OrganizationCopyright 2003 Pearson Education,Inc.2IntroductionIn the real world,while trade is partly explained by d

3、ifferences in labor productivity,it also reflects differences in countries resources.The Heckscher-Ohlin theory:Emphasizes resource differences as the only source of tradeShows that comparative advantage is influenced by:Relative factor abundance(refers to countries)Relative factor intensity(refers

4、to goods)Is also referred to as the factor-proportions theoryCopyright 2003 Pearson Education,Inc.3Assumptions of the ModelAn economy can produce two goods,cloth and food.The production of these goods requires two inputs that are in limited supply;labor(L)and land(T).Production of food is land-inten

5、sive and production of cloth is labor-intensive in both countries.Perfect competition prevails in all markets.A Model of a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.4/Input combinations that produce one calorie of foodUnit land input aTF,in acres per calorieUnit labor input aLF,in hours

6、 per calorieA Model of a Two-Factor EconomyFigure 4-1:Input Possibilities in Food ProductionCopyright 2003 Pearson Education,Inc.5Factor IntensityIn a world of two goods(cloth and food)and two factors(labor and land),food production is land-intensive,if at any given wage-rental ratio the land-labor

7、ratio used in the production of food is greater than that used in the production of cloth:TF/LF TC/LCExample:If food production uses 80 workers and 200 acres,while cloth production uses 20 workers and 20 acres,then food production is land-intensive and cloth production is labor-intensive.A Model of

8、a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.6CCFFWage-rental ratio,w/rLand-laborratio,T/LA Model of a Two-Factor EconomyFigure 4-2:Factor Prices and Input ChoicesCopyright 2003 Pearson Education,Inc.7Factor Prices and Goods PricesStolper-Samuelson Theorem(effect):If the relative price o

9、f a good increases,holding factor supplies constant,then the nominal and real return(in terms of both goods)to the factor used intensively in the production of that good increases,while the nominal and real return(in terms of both goods)to the other factor decreases.The reverse is also true.A Model

10、of a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.8SSRelative price ofcloth,PC/PFWage-rentalratio,w/rA Model of a Two-Factor EconomyFigure 4-3:Factor Prices and Goods PricesCopyright 2003 Pearson Education,Inc.9FFCCSSLand-labor Ratio,T/LRelativeprice ofcloth,PC/PFWage-rentalratio,w/r(PC/PF

11、)1(TC/LC)2(TC/LC)1(TF/LF)2(TF/LF)1(w/r)2(w/r)1IncreasingIncreasingA Model of a Two-Factor EconomyFigure 4-4:From Goods Prices to Input Choices(PC/PF)2Copyright 2003 Pearson Education,Inc.10An increase in the price of cloth relative to that of food,PC/PF,will:Raise the income of workers relative to t

12、hat of landowners,w/r.Raise the ratio of land to labor,T/L,in both cloth and food production and thus raise the marginal product of labor in terms of both goods.Raise the purchasing power of workers and lower the purchasing power of landowners,by raising real wages and lowering real rents in terms o

13、f both goods.A Model of a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.11Resources and OutputHow is the allocation of resources determined?Given the relative price of cloth and the supplies of land and labor,it is possible to determine how much of each resource the economy devotes to the p

14、roduction of each good.A Model of a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.12LFTFLCTCLabor used in food productionLabor used in cloth productionOFIncreasingIncreasingIncreasingIncreasingLand used in cloth productionLand used in food production1FCOCA Model of a Two-Factor EconomyFigur

15、e 4-5:The Allocation of ResourcesCopyright 2003 Pearson Education,Inc.13How do the outputs of the two goods change when the economys resources change?Rybczynski Theorem(effect):If a factor of production(T or L)increases,then the supply of the good that uses this factor intensively increases and the

16、supply of the other good decreases for any given commodity prices.The reverse is also true.A Model of a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.14CL2FL2CT1FT1CF1L1FL1CT2FT2C1A Model of a Two-Factor EconomyFigure 4-6:An Increase in the Supply of LandLabor used in food productionLabor u

17、sed in cloth productionIncreasingIncreasingIncreasingIncreasingLand used in cloth productionLand used in food productionF2O1FO2F2OCCopyright 2003 Pearson Education,Inc.15TT1TT2Output offood,QFOutput ofcloth,QCSlope=-PC/PFSlope=-PC/PF2Q2FQ2C1Q1FQ1CA Model of a Two-Factor EconomyFigure 4-7:Resources a

18、nd Production PossibilitiesCopyright 2003 Pearson Education,Inc.16An increase in the supply of land(labor)leads to a biased expansion of production possibilities toward food(cloth)production.The biased effect of increases(decreases)in resources on production possibilities is the key to understanding

19、 how differences in resources give rise to international trade.An economy will tend to be relatively effective at producing goods that are intensive in the factors with which the country is relatively well-endowed.A Model of a Two-Factor EconomyCopyright 2003 Pearson Education,Inc.17Assumptions of t

20、he Heckscher-Ohlin model:There are two countries(Home and Foreign)that have:Same tastesSame technologyDifferent resourcesHome has a higher ratio of labor to land than Foreign doesEach country has the same production structure of a two-factor economy.Effects of International Trade Between Two-Factor

21、EconomiesCopyright 2003 Pearson Education,Inc.18Relative Prices and the Pattern of TradeFactor AbundanceHome country is labor-abundant compared to Foreign country(and Foreign is land-abundant compared to Home)if and only if the ratio of the total amount of labor to the total amount of land available

22、 in Home is greater than that in Foreign:L/T L*/T*Example:if America has 80 million workers and 200 million acres,while Britain has 20 million workers and 20 million acres,then Britain is labor-abundant and America is land-abundant.In this case,the scarce factor in Home is land and in Foreign is lab

23、or.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.19When Home and Foreign trade with each other,their relative prices converge.The relative price of cloth rises in Home and declines in Foreign.In Home,the rise in the relative price of cloth leads to a

24、 rise in the production of cloth and a decline in relative consumption,so Home becomes an exporter of cloth and an importer of food.Conversely,the decline in the relative price of cloth in Foreign leads it to become an importer of cloth and an exporter of food.Effects of International Trade Between

25、Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.20RDRSRS*123Effects of International Trade Between Two-Factor EconomiesFigure 4-8:Trade Leads to a Convergence of Relative PricesRelative price of cloth,PC/PFRelative qualityof cloth,QC+Q*C QF+Q*FCopyright 2003 Pearson Education,Inc.21Hecksche

26、r-Ohlin Theorem:A country will export that commodity which uses intensively its abundant factor and import that commodity which uses intensively its scarce factor.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.22Trade and the Distribution of IncomeTra

27、de produces a convergence of relative prices.Changes in relative prices have strong effects on the relative earnings of labor and land in both countries:In Home,where the relative price of cloth rises:Laborers are made better off and landowners are made worse off.In Foreign,where the relative price

28、of cloth falls,the opposite happens:Laborers are made worse off and landowners are made better off.Owners of a countrys abundant factors gain from trade,but owners of a countrys scarce factors lose.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.23Diff

29、erence between the specific factors model and the Heckscher-Ohlin model in terms of income distribution effects:The specificity of factors to particular industries is often only a temporary problem.Example:Garment makers cannot become computer manufactures overnight,but given time the U.S.economy ca

30、n shift its manufacturing employment from declining sectors to expanding ones.In contrast,effects of trade on the distribution of income among land,labor,and capital are more or less permanent.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.24Factor Pr

31、ice EqualizationIn the absence of trade:labor would earn less in Home than in Foreign,and land would earn more.Factor-Price Equalization Theorem:International trade leads to complete equalization in the relative and absolute returns to homogeneous factors across countries.It implies that internation

32、al trade is a substitute for the international mobility of factors.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.25Has international trade equalized the returns to homogeneous factors in different countries in the real world?Even casual observation c

33、learly indicates that it has not.Example:Wages are much higher for doctors,engineers,technicians,mechanics and laborers in the United States and Germany than in Korea and Mexico.Under these circumstances,it is more realistic to say that international trade has reduced,rather than completely eliminat

34、ed,the international difference in the returns to homogeneous factors.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.26Effects of International Trade Between Two-Factor EconomiesTable 4-1:Comparative International Wage Rates(United States=100)Copyrigh

35、t 2003 Pearson Education,Inc.27Three assumptions crucial to the prediction of factor price equalization are in reality untrue:Both countries produce both goodsBoth countries have the same technologies in productionBoth countries have the same prices of goods due to tradeOne thing the factor-price eq

36、ualization theorem does not say is that international trade will eliminate or reduce international differences in per capita incomes.Effects of International Trade Between Two-Factor EconomiesCopyright 2003 Pearson Education,Inc.28Effects of International Trade Between Two-Factor EconomiesTable 4-2:

37、Composition of Developing-Country Exports (Percent of Total)Copyright 2003 Pearson Education,Inc.29Testing the Heckscher-Ohlin ModelTests on U.S.DataLeontief paradoxLeontief found that U.S.exports were less capital-intensive than U.S.imports,even though the U.S.is the most capital-abundant country i

38、n the world.Tests on Global DataA study by Bowen,Leamer,and Sveikauskas tested the Heckscher-Ohlin model using data for a large number of countries.This study confirms the Leontief paradox on a broader level.Empirical Evidence on the Heckscher-Ohlin ModelCopyright 2003 Pearson Education,Inc.30Table

39、4-3:Factor Content of U.S.Exports and Imports for 1962Empirical Evidence on the Heckscher-Ohlin ModelCopyright 2003 Pearson Education,Inc.31Empirical Evidence on the Heckscher-Ohlin ModelTable 4-4:Testing the Heckscher-Ohlin ModelCopyright 2003 Pearson Education,Inc.32Tests on North-South TradeNorth

40、-South trade in manufactures seems to fit the Heckscher-Ohlin theory much better than the overall pattern of international trade.The Case of the Missing TradeA study by Trefler in 1995 showed that technological differences across a sample of countries are very large.Empirical Evidence on the Hecksch

41、er-Ohlin ModelCopyright 2003 Pearson Education,Inc.33Empirical Evidence on the Heckscher-Ohlin ModelTable 4-5:Trade Between the United States and South Korea,1992(million dollars)Copyright 2003 Pearson Education,Inc.34Empirical Evidence on the Heckscher-Ohlin ModelTable 4-6:Estimated Technological E

42、fficiency,1983(United States=1)Copyright 2003 Pearson Education,Inc.35Implications of the TestsEmpirical evidence on the Heckscher-Ohlin model has led to the following conclusions:It has been less successful at explaining the actual pattern of international trade.It has been useful as a way to analy

43、ze the effects of trade on income distribution.Empirical Evidence on the Heckscher-Ohlin ModelCopyright 2003 Pearson Education,Inc.36The Heckscher-Ohlin model,in which two goods are produced using two factors of production,emphasizes the role of resources in trade.A rise in the relative price of the

44、 labor-intensive good will shift the distribution of income in favor of labor:The real wage of labor will rise in terms of both goods,while the real income of landowners will fall in terms of both goods.SummaryCopyright 2003 Pearson Education,Inc.37For any given commodity prices,an increase in a fac

45、tor of production increases the supply of the good that uses this factor intensively and reduces the supply of the other good.The Heckscher-Ohlin theorem predicts the following pattern of trade:A country will export that commodity which uses intensively its abundant factor and import that commodity

46、which uses intensively its scarce factor.SummaryCopyright 2003 Pearson Education,Inc.38SummaryThe owners of a countrys abundant factors gain from trade,but the owners of scarce factors lose.In reality,complete factor price equalization is not observed because of wide differences in resources,barrier

47、s to trade,and international differences in technology.Empirical evidence is mixed on the Heckscher-Ohlin model.Most researchers do not believe that differences in resources alone can explain the pattern of world trade or world factor prices.Copyright 2003 Pearson Education,Inc.39/Units of land used

48、 to produce one calorie of food,aTFUnits of labor used to produce one calorie of food,aLF1Isocost linesAppendix:Factor Prices,Goods Prices,and Input ChoicesFigure 4A-1:Choosing the Optimal Land-Labor RatioCopyright 2003 Pearson Education,Inc.40/12Appendix:Factor Prices,Goods Prices,and Input Choices

49、Figure 4A-2:Changing the Wage-Rental RatioUnits of land used to produce one calorie of food,aTFUnits of labor used to produce one calorie of food,aLFSlope=-(w/r)2Slope=-(w/r)1Copyright 2003 Pearson Education,Inc.41FFCCSlope=-(w/r)Appendix:Factor Prices,Goods Prices,and Input ChoicesFigure 4A-3:Determining the Wage-Rental RatioLand inputLabor inputCopyright 2003 Pearson Education,Inc.42FFCC1Slope=-(w/r)1CC2Slope=-(w/r)2Appendix:Factor Prices,Goods Prices,and Input ChoicesFigure 4A-4:A Rise in the Price of ClothLand inputLabor inputCopyright 2003 Pearson Education,Inc.43