## 1505 Topic 2 Essay

### Essay preview

THEORY AND POLICY
Topic 2: The Heckscher-Ohlin Trade
Model (H-O model)
Krugman, P.R. & Obstfeld, M. (2006). International economics: Theory and policy (7thed.). New York: Addison Wesley- Chapter 4.
201505

After studying this topic, you should be
able to understand:
2.1 Factor intensity and the HeckscherOhlin theory
2.2 Factor endowment and the HeckscherOhlin theory
2.3 Trade and the distribution of income
2.4 Empirical tests of the Heckscher-Ohlin
theory

2.1 Factor intensity and the
Heckscher-Ohlin theory

Eli Heckshcer and Bertil Ohlin developed the
Heckshcer-Ohlin theory (Factor Endowment
theory):
 Explains comparative advantage by
differences in relative national supply
conditions.

Key determinant: Resource endowments

Key Assumptions of the Model:
◦ Perfect competition
◦ Same demand (taste and preference) conditions
◦ Uniform quality factor inputs
◦ Same technology used
◦ 2 countries x 2 goods x 2 inputs
 2 inputs (fixed in supply, and perfectly mobile
between industries within a country.
 labor (L) and land (T)
or
 Labor (L) and capital (K)

Resources and Output Allocation (Before and after
the change of the factor):
 (1) Input allocation- “Box Diagram”
 (2) Output allocation- Production Possibilities
Frontier (PPF)

Example: Assume a country endowed with labor (L)
and land (T) in producing clothing (C) & food (F).
In autarky,
◦ Factor Intensity
 If TC/LC < TF/ LF
 Clothing is labor-intensive
 Food is land-intensive
◦ Factor Constraints
 The labor constraint: LC + LF = L
 The land constraint: TC + TF = T

(1) Resources (Inputs) Allocation
◦ How is the allocation of resources (inputs)
determined?
 Given the relative price of cloth and the
supplies of land and labor, it is possible to
determine how much of each resource the
economy devotes to the production of each
good:
 Mathematically- solving the 4 equations
 Graphically- illustrate using the “box
diagram”

Figure 1: The allocation of resources (Before the
change of the factor)
Given:
• Assume: TC/LC < TF/ LF
• Clothing is labor-intensive
• Food is land-intensive
(Clothing measures on the horizontal axis- lower ...