H O Theory

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

Trade Patterns: Heckscher-Ohlin (H-O) Factor Proportions Theory Econ 303 International Economics SSU

Production of cloth under constant opportunity cost: 

Production of cloth under constant opportunity cost Wheat, bushels Wheat, bushels Bushels/yard Cloth, yards Cloth, yards Cloth, yards Cloth, yards Cloth, yards US Rest of the World S Bushels/yard S

Deriving supply curves under increasing opportunity costs: 

Deriving supply curves under increasing opportunity costs Wheat, bushels Bushels/yard Cloth, yards Cloth, yards S

Comparative advantages under increasing opportunity cost: 

Comparative advantages under increasing opportunity cost Wheat, bushels Wheat, bushels Bushels/yard Cloth, yards Cloth, yards Cloth, yards Cloth, yards Cloth, yards US Rest of the World Srw Bushels/yard Sus

Deriving demand curves from indifference curves: 

Deriving demand curves from indifference curves Wheat, bushels Bushels/yard Cloth, yards D Better Cloth, yards

Production Possibility & Indifference Curves: 

Production Possibility & Indifference Curves Wheat, bushels Bushels/yard Cloth, yards D Cloth, yards S

Demand as a source of trade: 

Demand as a source of trade D S D S price wine Rest of the World USA X M International Market wine wine price price D’ X’

Explaining Trade Patterns: 

Explaining Trade Patterns Classics: Trade is supply driven Constant return to scale One factor of production: labor Constant productivity of labor

Explaining Trade Patterns: 

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

Explaining Trade Patterns: 

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

Factor Proportions TheoryHeckscher-Ohlin (H-O): 

Factor Proportions Theory Heckscher-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

Factor Proportions TheoryHeckscher-Ohlin (H-O): 

Factor Proportions Theory Heckscher-Ohlin (H-O) Assumptions (cont) But each country has different factor proportions: Example: One country is more labor abundant than the other

Factor Proportions TheoryHeckscher-Ohlin (H-O): 

Factor Proportions Theory Heckscher-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

Factor Proportions TheoryHeckscher-Ohlin (H-O): 

Factor Proportions Theory Heckscher-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.

Resource Endowment and Domestic Production Pattern: Equal Case: 

Resource Endowment and Domestic Production Pattern: Equal Case Wheat, bushels Wheat, bushels Cloth, yards Cloth, yards US Rest of the World Capital Labor Capital Labor

Production and ConsumptionSupply and Demand: Equal Case: 

Production and Consumption Supply and Demand: Equal Case Wheat, bushels Wheat, bushels Bushels/yard Cloth, yards Cloth, yards Cloth, yards Cloth, yards Cloth, yards US Rest of the World Srw Bushels/yard Sus Dus Drw

Resource Endowment and Domestic Production Pattern : Different Factor Proportions: 

Resource Endowment and Domestic Production Pattern : Different Factor Proportions Wheat, bushels Wheat, bushels Cloth, yards Cloth, yards US Rest of the World Capital Labor Capital Labor

Supply and Demand under Different Factor Proportions: International Trade: 

Supply and Demand under Different Factor Proportions: International Trade Wheat, bushels Wheat, bushels Bushels/yard Cloth, yards Cloth, yards Cloth, yards Cloth, yards Cloth, yards US Rest of the World Srw Bushels/yard Sus M X

This is the Heckscher-Ohlin theorem:: 

This is the Heckscher-Ohlin theorem: Each country exports the good intensive in the country's abundant factor.