Hecksher-Ohlin Model Flashcards
State the assumptions of the model
- Competitive mrkts
- Same technology across countries
- 2 goods
- 2 production factors
Give a brief description of the model.
The Hecksher-Ohlin Model is a model describing a change in distribution of income when opening up to trade. It has two important conclusions. First, a country with a relative abundance in a certain factor will export the good with a relative intensity in that factor. And that a rise in the relative price of a good will lead to a rise in the real return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the real return to the other factor.
What is the main difference between the ricardian model and the Heckshler-Ohlin model in terms of productivity assumption?
It allows productivity to change with output.
Let C be Labor intensive and F be Kapital intensive. Given an increase in the relative price Pc/Pf, can we unequivocally say that the real purshasing power of workers is higher or lower han before? Why?
We can unambiguously say that it is higher because, in a competitive market, factors of production are paid their marginal products, s.t when the ratio of labor to capital falls, the marginal product of labor increases and even if he purshased only good C, he is at least as well of as before.
Give a summary of the conclusion of the model
Generally, an economy will be relatively effective at producing goods that are intensive in the factors with wich the country is relatively well endowed.
What can we say about the change in the production of the 2 goods following an influx of a certain factor? Does the production of both rise, or only one? Why? Give a visual explanation.
We should see biased growth. That is, the industry which is relatively intensive in the influx factor will grow and the industry which is no will shrink.
Give a definition of abundance in the context of the model.
Abundance is defined in relative terms. That is, even if the US has more workers than MEX, since it has a lot more Kapital than the latter, MEX is Labour abundant relative to the US.
Give a brief explanation as to why prices converge in a free-trade economy.
Arbitrage conditions.
State what the Rybczynski theorem is, and how it can be concluded from the model.
At constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor intensively, and an absolute decline of the output of the other good.
State what the Stolper Samuelson Theorem is and how it can be deducted from the model.
The theorem states that a rise in the relative price of a good will lead to a rise in the real return to that factor which is used most intensively in the production of the good, and conversely, to a fall in the real return to the other factor.
Given Pc is labour intensive and Pf capital intensive, if Pc/Pf rises: ∆w/w>∆Pc/Pc>∆Pf/Pf>∆r/r
What is the Leontieff paradox, and how can it be “resolved”?
The Leontieff paradox states that given the model, the US should export Capital intensive products, which is not the case. The paradox can be attributed to the fact that one of the assumptions of the model is that technology is the same at home and in foreign, which clearly isn’t the case here.
Using ratios of units of capital needed for one unit of output in Kapital and Labor for both industrie, how can we see which industry is more labor/capital intensive.
If the ratio of Labor to capital is higher in one industry, then it is Labor intensiteve.
Why can we say that a country that is relatively abundant in a factor exports the good whose production is intensive in that factor.
Say Canada is relatively abundant in factor A. Then the US must be relatively abundant in factor B compared to Canada. So the relative price of A over B of the US is higher than in Canada. So the World relative price must be between the two such that it is Higher than Canada’s but lower than the US’s. So Canada export A, the factor for which it is relatively abundant, and vice-versaé
