Heckscher-Ohlin Model Flashcards
Main Drawback of Ricardian model
Remember too good to be true - everyone wins
But irl there are opposers of trade, lobbyists!
Also Ricardian ignores resource differences; e.g breed of cow in Japan, or oranges in Florida due to good weather
So what does HO theory say trade occurs due to
Differences in labour, skills, physical capital, capital, or other FoP across countries
I.e produce goods in which are intensive in the FoP the country is in abundance of.
3 other propositions
Factor price equalisation theorem
Stolper-Samuelson theorem
Rybczynski theorem
Factor price equalisation theorem
Trade equalises the real return to each FoP across countries.
(Convergence of factor prices)
The Stolper-Samuelson theorem
Trade increases the real return to a country’s relatively abundant factor
But reduces real return to the scarce factor
Rybczynski
An increase in a country‘s endowments of one factor will increase output of the good which uses that factor intensively, and reduce output of the other good
(e.g an increase in labour=produce more labour-intensive goods)
Assumptions for the HO Model:
2 countries
2 goods
2 factors of production
Both countries produce both goods
Production functions identical and CRTS
Factors are mobile between industries but immobile between counties
Factors are homogenous
Goods differ in their factor requirements, with no factor intensity reversals (i.e one is capital intensive, one is labour intensive)
Countries differ in their relative factor endowments (KEY, SO CHEAPER FACTOR CREATING AN INCENTIVE TO TRADE)
Why does dmr exist
Cost minimisation stuff pg8
Isocost equation
wL+rK=C
Isocost and isoquant - Isocost is the straight line, isoquant the curve
HO model - autarky to free trade
SS theorem - returns/gains to trade
FPE - factor price equalisation
