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International economics 20082009

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Heckscher-Ohlin-Samuelson model ... B. Ohlin (1933): goods can be produced with different factor intensity, hence, ... Heckscher-Ohlin (HO) theorem. Factor ... – PowerPoint PPT presentation

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Title: International economics 20082009


1
International economics2008/2009
  • Lecture 4 Neoclassical trade theory

2
Heckscher-Ohlin-Samuelson model
  • Trade can and up hurting large interest groups
    within any country (e.g. owners of labor, owners
    of capital, owners of land,...)
  • HOS theory provides a basis for the analysis of
    the effects of trade on different parts of the
    population

3
Heckscher-Ohlin-Samuelson model
  • The HOS theory predicts that the country exports
    products that use their abundant factors
    intensively and imports products that use their
    scarce factors intensively
  • A country is relatively labor-abundant if it has
    a higher ratio of labor to other factors than
    does the rest of the world

4
Heckscher-Ohlin-Samuelson model
  • A country is relatively capital-abundant if it
    has a higher ratio of capital to other factors
    than does the rest of the world

5
Heckscher-Ohlin-Samuelson model
  • The reason that the production costs for certain
    goods are lower in one region than in another is
    the difference in the relative scarcity of
    factors of production. Exports will then mainly
    consist of goods where the abundant factors of
    production are used in large quantities and the
    other factors in small quantities only, while
    imports consist of the types of goods requiring
    large quantities of the latter factors of
    production and factors of production not
    available in the region at all. (Ohlin 1999,
    14-15).

6
Heckscher-Ohlin-Samuelson model
  • Evolution of the model
  • E. Heckscher (1919) a statement that relative
    scarcity of production factors is a necessary
    condition for comparative cost differential and
    trade
  • B. Ohlin (1933) goods can be produced with
    different factor intensity, hence, due to
    internationally different factor prices each
    country specializes in good that requires a
    larger employment of relative abundant factor
  • P. Samuelson (1948, 1949) formulates both
    statement into a rigorous model HOS theorem
  • J. Vanek (1968) factor-content version of HOS
    theorem each country is a net exporter of factor
    services of its more abundant factor and a net
    importer of factor services of its more scarce
    factor
  • Stolper-Samuelson (1941) Stolper Samuelson
    theorem
  • Rybczynski (1955) Rybczynski theorem

7
Heckscher-Ohlin-Samuelson model
  • 4 MAJOR THEOREMS
  • Heckscher-Ohlin (HO) theorem
  • Factor-price-equalization theorem (FPE theorem)
  • Stolper-Samuelson (SS) theorem
  • Rybczynski (R) theorem

8
Four theorems of HOS
  • HO THEOREM
  • Given relative goods prices, a country
    specializes in production of good in which its
    more abundant factor is used more intensively
  • FACTOR-CONTENT VERSION OF HO THEOREM
  • Each country is a net exporter of factor services
    of its more abundant factor and a net importer of
    factor services of its more scarce factor

9
Four theorems of HOS
  • FPE THEOREM
  • International trade in goods leads to - relative
    and absolute - equalization of international
    factor prices
  • STOLPER-SAMUELSON THEOREM
  • An increase in price of one good increases
    nominal, relative and real rewards to factor that
    is used more intesively in production of that
    good and reduces the nominal, relative and real
    rewards to the other factor

10
Four theorems of HOS
  • RYBCZYNSKI THEOREM
  • Given different factor intensities and constant
    product prices, an increase in supply of one
    factor increases production of the good where
    this factor is used more intensively and
    decreases the production of the other good

11
Assumptions of the model
  • 2x2x2 model 2 PF (labor and capital), 2 goods in
    2 countries
  • perfect competition in goods and factor markets
  • identical technology, i.e. identical production
    functions, such that it holds
  • linear homogeneity (constant returns)
  • positive but decreasing marginal factor returns
  • no factor intensity reversals

12
Assumptions of the model
  • factors are perfectly mobile within a country but
    immobile internationally
  • goods in trade are identical irrespective the
    country of origin
  • homothetic and internationally identical consumer
    preferences
  • two countries differ only in terms of relative
    endowments of factors of production (strict HOS)
    but also differences in consumer preferences can
    be allowed for (broad neoclassic theory)

13
HOS implications
  • Trade arises due to different relative factor
    abundances in both countries and different factor
    intensities in the use of those factors in
    production
  • HOS predicts thatr opening up to trade will
    expand the exporting sector and contract the
    import-competing sector sector

14
HOS implications
  • short-run effects from trade
  • factors of production are not mobile (or are less
    mobile)
  • returns to those factors increase in the
    exporting sectors and
  • decrease in the import-competing sectors

15
HOS implications
  • Long-run effects from trade
  • Factors move in response to differences in
    returns between sectors
  • Factor movement changes the ratio of factor
    returns but not back to their pre-trade levels
  • There is namely an inherent imbalance in the
    changes in factor demand between the sectors

16
HOS implications
  • Long-run effects from trade
  • The labor-intensive sector will demand/supply
    relatively high share of labor and supply/demand
    a relatively low share of other factors
  • The capital-intensive sector will supply/demand
    relatively high share of capital and
    demand/supply a relatively low share of other
    factors

17
HOS implications
  • Long-run effects from trade
  • Factor prices will have to adjust in order to
    compensate for the difference in intensities
  • The price of the relatively abundant factor will
    increase, while the price of the relatively
    scarce factor will decrease

18
HOS implications
  • In the long run both sectors will experience
    similar changes of factor prices
  • In the short run, the changes in factor prices
    will depend on the sector in question
    (expanding-exporting sector or contracting
    importing sector)
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