CHAPTER 4Resources and Trade:The Heckscher-Ohlin Model (Factor Endowment Theory)*Comparative advantage is influence by the interaction between relative abundance and relative intensity.*Relative abundance: the proportions of different factors of production are available in different countries.If(T/L)H<(T/L)F, Home is labor-abundant and Foreign is land-abundant “per captia”,“relative” , no country is abundant in everything. *Relative intensity: the proportions of different factors of production are used in producting different goods.At any given factor prices, if (T C/L C)<(T F/L F), production of Cloth is labor-intensive and production of Food is land-intensive. A good can’t be both labor-intensive and land-intensive.(Factor-proportions theory)§1. A Model of Two-Factor Economy1. Assumption of the modelThe same two factors are used in both sectors: T、L ; Cloth、Food. (1)Alternative input combinations: In each sector, the ratio of land to labor used in production depends on the cost of labor relative to the cost of land, w/r.Figure 4A-2/L C↑and T F/L F↑)w/r↑↑L T/L↑(T(2) Relative intensityAt any given wage-rental ratio, food production use a higher land-labor ratio, food production is land-intensive and cloth production is labor-intensive.2.Factor price and goods prices(1)One-to-one relationshipBecause cloth production is labor-intensive while food production is land-intensive. The one dollar worth isoquant line of cloth and food are shown as Figure4-3-1.The two isoquants CC and FF are tangent to the same unit isocost line.Figure 4-3-1When P C rises, the slope of the unit isocost line w/r rises, that is, there is one-to-one relationship between factor price ratio w/r and the relative price of cloth P C/P F (Figure4-3-2). The relationship is illustrated by the curve SS.(Suppose the economy produce both cloth and food).Figure 4-3-2(2)Stolper-Sammelson effectIf the relative price of a good rises, the real income of the factor which intensivly used in that good will rise, while the real income↑,T F/L F↑CMPL C↑,W/P C↑, W/P F↑Figure 4-43.Resources and output(1)Relative price、resources and productionGiven the prices of cloth and food and the supply of land and labor, it is possible to determine how much of each resource the economy devoted to the production of each good; and thus also to determine the econom y’s output of each good.Figure4-5.The slope of OcC is Tc/Lc, the slope of O F F is T F/L F(2)Rybczynski effectIf goods prices remain unchanged, an increase in the supply of land will rise the output of food more than proportion to this increase, while the output of cloth will fall.Figure4-6T T F↑L F↑;T C↓L C Q F↑Q C↓Rybczynski effect: At unchanged relative goods price, if the supply of a factor of production increases, the output of the good that are intensive in that factor will rise, while the output of the other good will fall.Figure 4-7·The economy could produce more of both cloth and food than before.·A biased expansion of production possibilities.·An economy will tend to be relatively effective at producing goods that are intensive in that factors with which the country is relative well-endowed.§2.Effects of International Trade Between Two-Factor Economies1. Resources、relative prices and the pattern of tradeAs always, Home and Foreign are similar along many dimentions, such as relative demand and technology. The only differencebetween the countries is their resources: Home has a lower ratio of land to labor than Foreign does.·relative abundance relative supply relative prices trade(T/L)H<(T/L)F (T C/L C)<(T F/L F)RS lies to the right of RS*, (P C/P F)H<( P C/P F)F Home trade Cloth for Food, Foreign trade Food for Cloth.·H-O proposition: Countries tend to export goods whose production is intensive in factors with which they are abundantly endowed.Figure 4-82. Trade and the distribution of income·According to Stolper-Samuelson effect, a rise in the price of cloth raises the purchasing power of labour in terms of both goods, while lowering the purchasing power of land in terms of both goods. Thus,in Home,laborers are made better off while landowners are made worse off.·Owners of a country’s abundant factors gain from trade, but owners of a country’s scare factors lose.·The distinction between income distribution effects due to immobility and those due to differences in factor intensity.The specific factor model: Sectors; temporary and transitionalproblemThe H-O model: Factors; permanent problem·Resources and trade (factor endowment theory)Short-run analysis: The specific factor modelLong-run analysis: H-O model3. Factor price equalization·Factor price equalization proposition: International trade produces a convergence of relative goods prices. This convergence, in turns, causes the convergence of the relative factor prices. Trade leads to complete equalization of factor prices.(Figure4-8,4-4 or Figure 4A-3)Figure 4A-3·One-dollar-worth isoquant lines.·G oods’ price and technologies are the same, so CC、FF arethe same in both countries.·w/r are the same in both countries.·In an indirect way the two countries are in effect trading factors of production.（Home exports labor: more labor is embodied in Home’s exports than its imports；Foreign exports land: more land is embodied in F oreign’s exports than its imports.）·In the real world factor prices are not equalized (Table4-1). Why?Table 4-1 Comparative lnternational Wage Rates(United States=100)Hourly compensationCountry of production workers,2000United States 100Germany 121Japan 111Spain 55South Korea 41Portugal 24Mexico 12Sri Lanka* 2*1969. Source: Bureau of Labor Statistics, Foreign Labor Staistics Home Page. Three assumptions crucial to the prediction of factor price equalization are in reality certainly untrue.(1)Both countries produce both goods.(Trading countries aresufficiently similar in their relative factor endowments)(2)Technologies are the same.(Trade actually equalizes the prices ofgoods in two countries).(3)There are barriers to trade: natural barriers (such astransportation costs) and artificial barriers (such as tariffs, import quotas, and other restrictions).Case study: North-south trade and income inequality·Why has wage inequality in U.S. increased between the late 1970s and the early 1990s?(1)Many observers attribute the change to the growth of world tradeand in particular to the growing exports of manufactured goods from NIEs.Table 4-2 Composition of Developing-Country Exports(Percent of Total)Agricultural Mining ManufacturedProducts Products Goods1973 30 47.5 221995 14 22.5 62.5 Source: World Trade Organization(2)Most empirical workers believed that trade has been at most acontributing factor to the growing inequality and that the main villain is technology.§3. Empirical Evidence on the H-O Model1.Tests on U.S dataTable 4-3 Factor Content of U.S.Exports and lmports for 1962Imports Exports Capital per million dollars $2,132,000 $1,876,000 Labor(person-years) per million dollars 119 131 Capital-labor ratio (dollars per worker) $17,916 $14,321 Average years of education per worker 9.9 10.10.0189 0.0255 Proportion of engineers and scientists inwork forceSource:Rodert Baldwin,“Determinants of the Commodity Structure of U.S.Trade,”American Ecomomic Review61(March1971), pp.1·Leontief paradox: U.S. exports were less capital-intensive than U.S. imports. (Capital-labor ratio)·U.S. exports were more skilled labor-intensive and technology-intensive than its imports. (Average years of education; scientists and engineers per unit of sales)·A plausible explanation: U.S. may be exporting goods that heavily use skilled labor and innovative entrepreneurship(such as aircraft and computer chips), while importing heavy manufactures that use large amounts of capital (such as automobiles).2.Tests on global dataTable 4-4 Testing the Heckscher-Ohlin ModelFactor of Production Predictive Success*Capital 0.52Labor 0.67Professional workers 0.78Managerial workers 0.22Clerical workers 0.59Sales workers 0.67Service workers 0.67Agricultural workers 0.63Production workers 0.70Arable land 0.70Pasture land 0.52Forest 0.70*Fraction of countries for which net exports of factor runs in predicted direction.Source: Harry P.Bowen, Edward E.Leamer, and Leo Sveikauskas,“Multicountry, Multifactor Tests of the Factor Abundance Theory,”American Economic Review 77(December 1987), pp.791-809.·If the factor-proportion theory was right, a country would always export factors for which the factor share exceeded the income share, import factors for which it was less.·Two-thirds of the factors were trading in the predicted direction less than 70 percents of the time. This result confirms the Leontief paradox on a broader level: Trade often doesn’t run in the direction that the H-O theory predicts.3.Test on North-South tradeNorth-South trade in manufactures seems to fit the H-O theory much better.Table 4-5 Trade Between the United States and South Korea, 1992(million dollars)U.S.Exports to U.S.Imports from Type of Product South Korea South Korea Chemicals, plastics, pharmaceuticals 1340 105 Power-generating equipment 705 93 Professional and scientific instruments 512 96 Transport equipment other than roadVehicles (mainly aircraft) 1531 78 Clothing and shoes 11 4203 Source: Statistical Abstract of the United States,1994.4. The case of the missing trade·A previously overlooked empirical problems: The H-O model can predict not only the direction but the volume of trade.·Factor trade in general turns out to be much smaller than the H-O model predicts.·A large part of the reason for this disparity comes from a false prediction of large-scale trade in labor between rich and poor countries.·This puzzle can be resolved only by dropping the H-O assumptions that technologies are the same across countries. (Table4-6)Table 4-6 Estimated Technological Efficiency, 1983 (United States=1) Bangladesh 0.03Thailand 0.17Hong Kong 0.40Japan 0.70West Germany 0.78Source: Trefler, American Economic Review, (December 1995),p.1035. Implications of the testsWhile the H-O model has been less successful at explaining the actual patterns of trade than one might hope, it remains vital for understanding its effects on the distribution of income.Answers to Problems of Chapter 41·The ratio of land to labor in cattle exceeds the ratio in wheat in the United States ,im States .·Cattle is land intensive in other countries too if the ratio of land to labor in cattle production exceeds the ratio in wheat production in that country.·Comparisons between another country and the United States is less relevant for this purpose. 2a.b.L =800: T C =33.33, L C =666.67; T F =26.67, L F =133.33 L =1000: T C =46.67, L C =933.33; T F =13.33, L F =66.67 L =1200: T C =60, L C =1200; T F =0, L F =0.(complete specialization).c. At constant factor prices, some labor would be unused, so factor prices would have to change, or there would be unemployment. 3 What matters are not the absolute abundance of factors, but their relative abundance. Poor countries have an abundance of labor relative to capital when compared to more developed countries. 4 ·In the Ricardian model, labor gains from trade through an increase in its purchasing power. This result does not support labor union demands for limits on imports from less affluent countries.11205606060020560020400;40200C F C F C F C F C F C F C C F F T T L L T T T T L L T T T L T L ==⎧⎧+=+=⎪⎪⇒⎨⎨+=+=⎪⎪⎩⎩⎧⎧==⎪⎪⇒⎨⎨==⎪⎪⎩⎩·Labor may gain or lose from trade in the context of the Specific Factors model. Purchasing power in terms of one good will rise, but in terms of the other good it will decline.·In the context of the Heckscher-Ohlin model, unskilled U.S. labor loses from trade since this group represents the relatively scarce factors in this country. The results from the Heckscher-Ohlin model support labor union demands for import limits.5 ·Conditions necessary for factor price equalization include ……·The inequality wages within regions of U.S. may reflect all of these reasons; however, the barriers to trade are purely “natural” barriers due to transportation costs.·U.S. trade with Mexico, by contrast, is also subject to legal limits;together with cultural differences that inhibit the flow of technology, this may explain why the difference in wage rates is so much larger.6 ·The factor proportions theory states that……·Leontief found that the United States exported labor-intensive goods. ·Bowen, Leamer and Sveikauskas found for the world as a whole the correlation between factor endowment and trade patterns to be tenuous .·The data do not support the predictions of the theory that countries’ exports and imports reflect the relative endowments of factors.7 ·The Heckscher-Ohlin theory would be applied to “effectivefactors” which adjust for the differences in technology or worker skills or land quality (for example ).·The adjusted model has been found to be more successful than the unadjusted model at explaining the pattern of trade between countries.·Factor-price equalization concepts would apply to the effective factors.。