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Basic description of the Hecksher-Ohlin model, its assumptions and theorems.

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- 1. Hecksher-Ohlintrade modeljhuato.sfc@gmail.com
- 2. Goals Understand the setup of the Hecksher- Ohlin model of trade, in which trade is based on differences in productive factor (input) endowments Understand the main theorems that result from the Hecksher-Ohlin model of trade, and apply the insights in the analysis of real-world cases
- 3. Hecksher-Ohlin model There are two countries (H and F), two factors of production (labor [L] and capital [K]), and two goods (corn [C] and steel [S]) The K/L ratio for H is higher than for F, i.e. H is capital- abundant or labor-scarce, F is capital-scarce or labor- abundant Same technology is available in H and F, there are constant returns to scale in production, and C technology is labor- intensive while S-technology is capital-intensive K and L move freely within each country, but not across countries There is perfect competition within each country and, with trade, the price of a good is the same in both countries Demand patterns (preferences) are identical in both countries
- 4. Theorems derived from theHecksher-Ohlin model1. Hecksher-Ohlin theorem2. Stolper-Samuelson theorem3. Factor-price equalization theorem4. Rybczynski theorem
- 5. Hecksher-Ohlin theoremWith trade, the country with the higher K/Lratio (e.g. H, which is K-abundant) willexport the good that is intensive in the useof K (e.g. Steel) and import the good that isintensive in the use of L (e.g. corn). Thepattern of trade of the other country will bethe converse.
- 6. Hecksher-Ohlin theorem
- 7. Stolper-Samuelson theoremIn each country, trade will increase the realreturn of the abundant factor of productionand decrease the real return of the scarcefactor of production.E.g. for H, where K is abundant and L isscarce, trade will increase r/P and decreasew/P, where r is the return on K (or “profitrate”), w is the return on L (or wage rate), and Pis the price level.
- 8. Stolper-Samuelson theoremAt H, let MCS = a r + b w and MCC = c r + d w, where a, b, c, and dare given physical input/output ratios. Under competition, P=MC:PS = a r + b w (1) and PC = c r + d w (2).Suppose that, due to trade, PS goes up and PC goes down. Sincesteel uses K intensively compared to L and its output willexpand, then r will go up. If r increases and PC decreases, then by(2) w must fall more than proportionally.Also, since corn uses L intensively compared to K and its outputshrinks, then w will go down. If w decreases and PS increases, thenby (1) r must increase more than proportionally.In other words, a shift in the output mix towards more steel and lesscorn will have a magnified effect on r and w compared to PS andPC. Therefore, r/P will go up and w/P will go down, where P is aweighted average of PS and PC.
- 9. FPE theorem Compared to autarky, at H, the price of steel increases and the price of corn drops, which makes r go up and w go down (S-S theorem) Compared to autarky, at F, the price of steel decreases and the price of corn increases, which makes r* go down and w* go up (S-S theorem) This process continues to operate until the prices of corn and steel are equalized in both countries, which leads to r=r* and w=w* Little empirical evidence supporting the notion of total equalization of factor prices
- 10. Final points All is required for trade is CA. As long as the MRTs are not equal, the countries have a basis for trading. With equal MRTs, the basis for trade cannot be technology, i.e. resource requirement differences. (They may still trade on the basis of preference differences.) Without full employment, the model does not hold any longer as the MRTs are undefined. It highlights an important source of trade. Empirically: economists need to go and measure the effect of these difference in technology (MRTs) on observable trade. Results are mixed.
- 11. Rybczynski theorem Ifthe relative endowment of productive factors changes in a country, the output of the good intensive in the (relatively) expanding factor will increase more than proportionally E.g. if there is an increase in the immigration of L to H (other things equal), then the production of corn will expand faster than L itself

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