Chapter 4 Resources and Trade. The Heckscher-Ohlin Model
Chapter 4 ▪ Resources and Trade:The Heckscher-Ohlin Model
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 Copyright C 2003 Pearson Education, Inc 4-2
Copyright © 2003 Pearson Education, Inc. Slide 4-2 ▪ 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 Chapter Organization
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 Copyright C 2003 Pearson Education, Inc Slide 4-3
Copyright © 2003 Pearson Education, Inc. Slide 4-3 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 landt) Production of food is land-intensive and production of cloth is labor-intensive in both countries Perfect competition prevails in all markets Copyright C 2003 Pearson Education, Inc Slide 4-4
Copyright © 2003 Pearson Education, Inc. Slide 4-4 ▪ 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 Figure 4-1: Input Possibilities in Food Production Unit land input aTF, in acres per calorie Input combinations that produce one calorie of food Unit land input alF, Copyright C 2003 Pearson Education, Inc in hours per calorie Slide 4-5
Copyright © 2003 Pearson Education, Inc. Slide 4-5 // Input combinations that produce one calorie of food Unit land input aTF , in acres per calorie Unit land input aLF , in hours per calorie A Model of a Two-Factor Economy Figure 4-1: Input Possibilities in Food Production
A Model of a Two-Factor Economy Factor Intensity In 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 ratio used in the production of food is greater than that used in the production of cloth TELE>TOLC Example: 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 Copyright C 2003 Pearson Education, Inc Slide 4-6
Copyright © 2003 Pearson Education, Inc. Slide 4-6 • Factor Intensity – In a world of two goods (cloth and food) and two factors (labor and land), food production is landintensive, if at any given wage-rental ratio the landlabor ratio used in the production of food is greater than that used in the production of cloth: TF /LF > TC/ LC – Example: 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 a Two-Factor Economy
A Model of a Two-Factor Economy Figure 4-2: Factor Prices and Input Choices Wage-rental ratio, wlr cC FF Land-abor ratio, T/L Copyright C 2003 Pearson Education, Inc Slide 4-7
Copyright © 2003 Pearson Education, Inc. Slide 4-7 CC FF Wage-rental ratio, w/r Land-labor ratio, T/L A Model of a Two-Factor Economy Figure 4-2: Factor Prices and Input Choices
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 Copyright C 2003 Pearson Education, Inc Slide 4-8
Copyright © 2003 Pearson Education, Inc. Slide 4-8 ▪ 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 Figure 4-3: Factor Prices and Good prices Relative price of cloth, PCPE Wage-rental ratio, wr Copyright C 2003 Pearson Education, Inc Slide 4-9
Copyright © 2003 Pearson Education, Inc. Slide 4-9 SS Relative price of cloth, PC/PF Wage-rental ratio, w/r A Model of a Two-Factor Economy Figure 4-3: Factor Prices and Goods Prices
A Model of a Two-Factor Economy Figure 4-4: From Goods Prices to Input Choices Wage-renta ratio, w/r FF w/门2 Relative (PP:)2(Pc/PF) (TC/Lcl'(TC/LC(T/L)(T/LELand price of labor cloth, PCPE Increasing Increasing Rato,T几 Copyright C 2003 Pearson Education, Inc lide 4-10
Copyright © 2003 Pearson Education, Inc. Slide 4-10 FF CC SS Landlabor Ratio, T/L Relative price of cloth, PC/PF Wage-rental ratio, w/r (PC/PF ) 1 (TC/LC) 2 (TC/LC) 1 (TF /LF ) 2 (TF /LF ) 1 (w/r) 2 (w/r) 1 Increasing Increasing A Model of a Two-Factor Economy Figure 4-4: From Goods Prices to Input Choices (PC/PF ) 2