Hecksher-Ohlin model Flashcards
How does HO model differ from SF model?
It deals with long term prospective, in which all factors are mobile across sectors.
According to HO model, what is the source of competitive advantage in different countries?
Resource endowments.
What is another name for HO model?
Factor proportions theory.
What industry will countries specialise in according to HO model?
The one that is abundant factor intensive.
What are the assumptions of HO model?
- 2 countries, 2 goods, 2 inputs
- Full factor utilization
- Perfect competition
- Labor and capital can be used in both sectors
- Technology Qi=Qi(Li,Ki)
- Constant returns to scale but diminishing returns to factors
- Factor substitutability
- Factor intensity different across goods
- Countries are abundant in different factors
What is the variable proportions HO model?
HO model where factors can be substituted and different mixes can be used.
What happens when countries move from autarky to free trade?
Relative prices are affected.
What do firms do in autarky and free trade?
Choose how much to produce and how much to use of each factor in order to maximise profits.
Are producers price-takers in HO model?
yes
what is relative factor intensity?
Ratio of usage of one factor over the other.
Labour becomes less productive if?
Labour intensity increases.
If the relative price of labour w/r increases, then…?
Labour intensity decreases in both sectors.
What is Rybczynski theory?
It is the theory that states that an increase of one factor (holding prices of goods constant) increases the production of the good that uses that factor intensively and reduces the production of the other good.
What is Hecksher-Ohlin theory?
It is theory that states that a country abundant in a certain factor will export the good which is intensive in that factor.
What does Stolper-Samuelson theory state?
Its states that in each country, the income of abundant factor increases with trade, while the scarce resource decreases.
