Chapter4ResourcesandTradeTheHeckscher-OhlinModel.pptVIP

Chapter Organization Introduction A Model of a Two-Factor Economy Effects of International Trade Between Two-Factor Economies Empirical Evidence on the Heckscher-Ohlin Model Summary Appendix: Factor Prices, Goods Prices, and Input Choices Introduction In the real world, while trade is partly explained by differences in labor productivity, it also reflects differences in countries’ resources. The Heckscher-Ohlin theory: Emphasizes resource differences as the only source of trade Shows that comparative advantage is influenced by: Relative factor abundance (refers to countries) Relative factor intensity (refers to goods) Is also referred to as the factor-proportions theory A Model of a Two-Factor Economy Assumptions of the Model An 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-intensive and production of cloth is labor-intensive in both countries. Perfect competition prevails in all markets. A Model of a Two-Factor Economy A Model of a Two-Factor Economy A Model of a Two-Factor Economy A Model of a Two-Factor Economy Factor Prices and Goods Prices Stolper-Samuelson Theorem (effect): If the relative price of 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 of a Two-Factor Economy A Model of a Two-Factor Economy A Model of a Two-Factor Economy An increase in the price of cloth relative to that of food, PC/PF ,will: Raise the income of workers relative to that 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