Heckscher-Ohlin Model

Question 1

setup for the model

Answer 1

Identical technologies in both countries.
No factor intensity reversals (FIR) −→ FPE holds.
Identical homothetic preferences (no taste differences, no purchasing power effects)
There are no trade costs
Two countries: we assume that L/K>L/K
(Home country is labor-abundant, foreign is capital-abundant)
Good 1 is labor-intensive, good 2 capital-intensive.
Factors mobile across industries but not across countries.
They are both fully employed.
Industries are perfectly competitive.

Question 2

Heckscher-Ohlin Theorem

Answer 2

Each country exports the good that uses its abundant factor intensively.
Each country will export the good whose free trade price is higher than its autarky price (and import the other good).

Question 3

explain graphs on autarky prices in the model

Answer 3

page 21-22

Question 4

explain graphs on free trade prices in the model

Answer 4

page 22

Question 5

explain the model implications

Answer 5

The relative price of good 1 rises at home. The factor used intensively in that good (labor) will gain in real terms, the other factor (capital) loses. Reverse for foreign.

Wages would be lower in the home autarky equilibrium than in the foreign autarky equilibrium. With trade, home shifts production toward the labor-intensive good, exports it, and thereby absorbs the abundant factor.

Factor prices are equalized in the two countries after trade.

Abundant factor gains, scarce factor loses.
Labor is more abundant in the home country than in the whole world and vice versa. The wage in the home country increases due to trade.

Capital (labor) abundant country specializes in capital- (labor)-intensive industry.