Trade Patterns: HeckscherOhlin HO Factor Proportions Theory

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Trade Patterns Heckscher-Ohlin (H-O)Factor
Proportions Theory

• Econ 303
• International Economics
• SSU

2
Production of cloth under constant opportunity
cost
US
Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards
Cloth, yards
S
Bushels/yard
Bushels/yard
S
Cloth, yards
Cloth, yards
Cloth, yards
3
Deriving supply curves under increasing
opportunity costs
Wheat, bushels
Cloth, yards
S
Bushels/yard
Cloth, yards
4
Comparative advantages under increasing
opportunity cost
US
Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards
Cloth, yards
Sus
Srw
Bushels/yard
Bushels/yard
Cloth, yards
Cloth, yards
Cloth, yards
5
Deriving demand curves from indifference curves
Better
Wheat, bushels
Cloth, yards
Bushels/yard
D
Cloth, yards
6
Production Possibility Indifference Curves
Wheat, bushels
Cloth, yards
S
Bushels/yard
D
Cloth, yards
7
Demand as a source of trade
Rest of the World
International Market
USA
S
price
price
price
X
S
X
M
D
D
D
wine
wine
wine
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Explaining Trade Patterns

• Classics
• Trade is supply driven
• Constant return to scale
• One factor of production labor
• Constant productivity of labor

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Explaining Trade Patterns

• A More Complete Explanation
• Production differences (then supply) matters
• Consumption differences (then demand) matters
• Market Structures (competition vs. monopoly
  matters)

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Explaining Trade Patterns

• Neo-Classical
• Trade is supply and demand driven
• But, supply still is the determinant factor
• Decreasing returns to scale
• Many factors of production labor, capital
• Decreasing marginal productivity

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Factor Proportions TheoryHeckscher-Ohlin (H-O)

• Assumptions
• Both countries have access to same technologies
• Two production sectors
• One is more labor intensive than the other sector
• The other sector is more capital (or land)
  intensive
• Two or more production factors
• Similar production functions
• Decreasing marginal productivities for each
  factor (others fixed)
• Decreasing returns to scale for all factors (all
  variable)
• Both countries have the same preferences

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Factor Proportions TheoryHeckscher-Ohlin (H-O)

• Assumptions (cont)
• But each country has different factor
  proportions
• Example One country is more labor abundant than
  the other

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Factor Proportions TheoryHeckscher-Ohlin (H-O)

• Propositions
• A country will choose to produce more in the
  sector which is more intensive in the factor that
  is more abundant.
• Abundance is a relative concept relatively
  abundant

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Factor Proportions TheoryHeckscher-Ohlin (H-O)

• Countries export the products that use their
  abundant factors intensively (and import the
  products that use their scarce factors
  intensively).
• With no trade the relatively abundant production
  factors will be relatively cheap, so that the
  product that uses these factors relatively
  intensively will have a low no-trade price. As
  trade is opened, this product is exported.

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Resource Endowment and Domestic Production
Pattern Equal Case
US
Rest of the World
Capital
Capital
Labor
Labor
Wheat, bushels
Wheat, bushels
Cloth, yards
Cloth, yards
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Production and ConsumptionSupply and Demand
Equal Case
US
Rest of the World
Wheat, bushels
Wheat, bushels
No need to trade
Cloth, yards
Cloth, yards
Srw
Sus
Bushels/yard
Bushels/yard
Dus
Drw
Cloth, yards
Cloth, yards
Cloth, yards
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Resource Endowment and Domestic Production
Pattern Different Factor Proportions
US
Rest of the World
Capital
Capital
Labor
Labor
Wheat, bushels
Wheat, bushels
Cloth, yards
Cloth, yards
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Supply and Demand under Different Factor
Proportions International Trade
US
Rest of the World
Wheat, bushels
Wheat, bushels
Conditions for trade
Cloth, yards
Cloth, yards
Sus
Srw
X
Bushels/yard
Bushels/yard
M
Cloth, yards
Cloth, yards
Cloth, yards
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This is the Heckscher-Ohlin theorem

• Each country exports the good intensive in the
  country's abundant factor.