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International economics > Trade and Resources: The Heckscher-Ohlin Model > Flashcards

Trade and Resources: The Heckscher-Ohlin Model Flashcards

1
Q

What is the basis and pattern of international trade in HO model?

A

Basis-factors of production

Pattern- Factor intensity

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2
Q

Who made the HO model?

A

It is named after Eli Heckscher and his student

Bertil Ohlin, who explained trade with resources, i.e. factor endowments. Based on a Lon-run approach

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3
Q

What are the components of the environment of HO model?

A
  1. Two goods
  2. Two countries
  3. two input factors
  4. Identical preferences across countries
  5. Free trade
  6. Balanaced trade
  7. Resources are different across countries, factor intensities are different across industries
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4
Q

What are the first 3 components environment grouped together as?

A

2X2X2 Model
•1- Two goods- X&;Y also described as two industries e.g. wheat & cloth
•2. two Countries: Home and Foreign (F can be considered rest of the world)
•3) two (input) factors: Labour (L) and Capital (K)
- Labour and capital are fully employed-all resources used
- Labour and capital are perfectly mobile across Goods (Industries), but NOT mobile across countries (No international migration or FDI).
-Factors can also be skilled vs unskilled labour, or other two factors

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5
Q

Explain the first two components of the environment

A
  • 1- Two goods- X&;Y also described as two industries e.g. wheat & cloth
    1. two Countries: Home and Foreign (F can be considered rest of the world)
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6
Q

Explain the third component of HO model

A

•2 (input) factors: Labour (L) and Capital (K)

  • Labour and capital are fully employed-all resources used
  • Labour and capital are perfectly mobile across Goods (Industries), but NOT mobile across countries (No international migration or FDI).
  • Factors can also be skilled vs unskilled labour, or other two factors
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7
Q

Explain components 4-6 of the model

A
  1. Identical preferences across countries
    e.g. consumers in two countries are equally satisfied with 4 units of X and 5 units of Y so ICs are the same
  2. Free trade
    No tariffs or non-tariff barriers, or any transportation cost and etc.
  3. Balanced trade
    The value of exports is equal to the value of imports.
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8
Q

Explain the 7th component of the model

A
  • Resources (factor abundances) are different across countries e.g. China has more labour, UK has more capital
  • factor intensities are different across industries e.g. computers need more capital than shoes
  • This is the most important one for HO Model
  • Unlike Ricardian model, technology is the same across countries
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9
Q

What is the ratio to work out factor abundances?

A

Capital/Labour ratio- K/L
• This is needed when one country has more of both factors than the other country but the ratio needed to find the abundances

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10
Q

What is the meaning of (K/L)h > (K/L)f?

A

country H is capital abundant and F is labour abundant, e.g. US and China

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11
Q

What is the equation used to see factor intensities?

A

Capital/Labour usage ratio (K/L) to see factor usage to produce one unit of output

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12
Q

What is the meaning of (Kx/Lx) > (Ky/Ly)?

A

industry X is capital intensive and Y is labour intensive, e.g. computers and shoes respectively

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13
Q

What is the shape of the PPF in HO model?

A
  • PPF is bowed out for both countries. When PPF is bowed out, OC of X increases as there is more X (less Y)
  • PPF will be skewed in the direction of the industry that the country is abundant in e.g. H is capital abundant and X is capital intensive, PPF for H is skewed in the direction of X.
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14
Q

Why is the Ricardian PPF a straight line?

A

Because labour output is the same across industries so only sacrificing (OC) the same amount for any change in output

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15
Q

Explain OC in HO model

A
  • Bowed shape means it becomes more difficult to shift resources from one industry to another e..g Y to X as one industry increases production
  • Change in Y/Change in X =Slope= OC of X
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16
Q

What is the PPF in autarky?

A

PPF acts as the income budget of the a country-t all combinations beyond PPF are not affordable (unattainable)

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17
Q

What is the autarky equilibrium point?

A
  • Tangent point between the PPF and IC is the equilibrium

* The point where the country produces and consumes i.e. Production point=Consumption point

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18
Q

Explain relative prices in autarky equilibrium

A

• the relative price of X (horizontal axis) is
equal to the absolute value of the slope of PPF.
• Relative price indicates which product should be exported by which country

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19
Q

What does [Slope]h < [Slope]f mean when two countries open to trade?

A

(Px/Py)h < (Px/Py)f
This suggests that Goods X is relatively expensive in Country F than in Country H. Therefore, Country H can sell (export) Goods X to Country F.

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20
Q

What is the HO theorem?

A

Based on relative prices:
• each country will export the good that uses
intensively the factor of production it has in abundance and will import the other good
e.g. if H is capital abundant and X is capital intensive, H exports X (imports Y)
• so Factor endowments (abundance and intensity) determine trade pattern

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21
Q

What does the world price need to be for free trade equilibrium?

A
  • Needs to be between autarky relative prices in order for e.g. H to want to sell and F to want to buy
  • Lower than autarky prices will mean H&;F would both want to import as cheap prices so no trade
  • Higher than autarky prices= both H&F would want to export as the price for their products is high
22
Q

What is the diversification of production that takes place in free trade?

A
  • A country will try to produce more of a product that has a high world price to then export and less of the other product that will be imported
  • Move from A to B
23
Q

Where is the diversification production point?

A

the tangent point between PPF and world price line

24
Q

Explain diversification of production

A
  • No complete specialisation as continued production will lead to gradient being higher than world price and then no trade
  • The country still produces both products at this point
25
Q

Explain consumption in the trade equilibrium

A

1) Because of the opportunity to trade, the budget is now relaxed.
(2) The new budget in free trade is the world price line.
(3) The free trade equilibrium is the tangent point between new
budget (world price line) and IC.
(4) The tangent point is the consumption point in free trade.

26
Q

Explain the trade triangle

A
  • Two trade triangles should be the same. Refer to the figure: ∆BCD = ∆C∗B∗D∗
  • Helps to show how much will be exported and imported by each country
  • Country H’s export of X is equal to country F’s import of X. (BD = C∗D∗)
  • Country F’s export of Y is equal to country H’s import of Y. (CD = B∗D)
27
Q

What do the different letters mean in trade equilibrium??

A

A-Autarky equilibrium
B- diversification
C- Free trade equilibrium
D- Consumption in trade

28
Q

If B(production) is (120,50) and D (consumption) is (80,60), what are the exports and imports?

A

Export 40 of X and import 10 of Y

29
Q

Explain the trade gains?

A
  • Both countries are better off because both countries have arrived at higher ICs.
  • Consumption point is not attainable in autarky
30
Q

How is the CA found?

A

By looking at the slopes i.e. flatter means CA in x so try to export

31
Q

What theory explains factor earnings across countries? and what does it summarise?

A
  • Stolper-Samuelson (SS) Theorem
  • There are overall gains at the country level but in terms of the factors, labour and capital, there are winners and losers
  • e.g. Capital owners are winners while workers are losers but capital owners gain more than workers lose, so overall gains at the country level
32
Q

What is the Stolper-Samuelson theorem?

A
  • An increase in the relative price of a good will increase the real earnings of the factor used intensively in the production of that good and decrease the real earnings of the other factor
  • e.g. world price higher than the relative price of X for H in autarky so real earnings of capital increases
33
Q

What is real earnings? and equation

A
  • The purchasing power of the earnings-How many x or y can be bought with your earnings
  • Real rental of capital, r/PX and r/PY
  • Real wage of labour, w/PX and w/PY
34
Q

Explain why using SS theorem a scenario where real rental of capital increases and real wage of labour decreases

A
  • production X ↑ and production of Y ↓in H due to relative prices
  • X industry absorbs capital faster (e.g. computers) than Y industry releases it, -» to a national shortage in capital so real earnings of capital is higher & real earnings of labour is lower due to national surplus
  • opposite for F country
35
Q

What is the caveat with the effects of SS theorem

A

Only short-run effect and in the long term all factors are fully employed once adjusted

36
Q

What is the assumption from combining SS theorem with HO theorem?

A
  • each country will export the good that uses intensively the factor of production it has in abundance,
  • and this factor has higher real earnings.
  • while each country will import the other good and the other factor has lower real earnings
37
Q

What are the implications of HO theorem?

A
  • re-distributional effects from trade
  • Winners and losers from trade
  • Supporters and detractors of trade
  • Inequality of income
  • Skill premium
38
Q

Explain the implications of the re-distributional effects of trade and winners and losers

A

Unlike Ricardian model…
• there are re-distributional effects from trade (or trade liberalization), from scarce factor to abundant factor.
•there are winners (abundant factor) and losers (scarce factor)

39
Q

Explain the implications of the support/detractors of trade and inequality of income

A

Unlike Ricardian…
•there are who support the trade (abundant factor) and who do not (scarce factor).
• If capital owners are rich and workers are poor, trade can increase income inequality in H country e.g. US but inequality may be decreased in say China

40
Q

Explain the implications of the skill premium

A

Considering skilled and unskilled labour as the two factors, trade can increase skill premium in country that is abundant in skilled labour

41
Q

What can the two factors, capital and labour also be sen as?

A

Skilled labour (capital) and unskilled labour (labour)

42
Q

What is a key empirical test for HO model? and main finding

A 
• Leontief's paradox 1947
• It found that US, as the capital abundant country, 
  imported capital intensive goods and exported labour 
  intensive goods (so contrary to HO model)
43
Q

Instead of rejecting HO model because of the Leontief research, what were the explanations?

A
  • US and foreign technologies are not the same, in contrast to what the HO and Leontief assumed.
  • More factors in real world than just labour and capital
  • Skilled labour/ Human capital
  • Trade tarif
  • World War II interruptions in 1947
  • Preferences differ across countries
44
Q

Explain the differing tech explanation of the Leontief paradox

A
  • In HO model, the technologies are the same across countries.
  • Leontief simply used US technology as the foreign technology
45
Q

Explain the factors explanation of the Leontief paradox

A
  • The HO model is two-factor model.
  • In real world, there are more than two factors.
  • so classification of labour intensive industry and capital intensive industry is problematic.
  • US imported many natural resources, which require large amounts of physical capital (e.g. coal mining, steel)- partly explains the large capital intensity of US imports
46
Q

Explain the skilled labour/human capital explanation of the Leontief paradox

A
  • US labour has more skills, thereby increasing their productivity and making exports skilled-labour intensive.
  • US labour has more human capital (e.g. education, training).
  • If adding human capital to physical capital, US exports will be more capital-intensive.
47
Q

Explain the trade tarrif explanation of the Leontief paradox

A
  • HO model is a free trade model
  • Most heavily protected at the time in US were labour intensive
  • so reduced labour intensity of us imports
48
Q

Explain the WW2 interruptions explanation of the Leontief paradox

A
  • HO model is a long-run equilibrium model.
  • economies of Europe and Japan were not in equilibrium in 1947;
  • rather, they were beginning a process of rapid dynamic adjustment in production and factor supplies.
49
Q

Explain the differing preferences explanation of the Leontief paradox

A
  • In HO model, preferences are identical across countries.
  • If the preferences differ across countries, the pattern of comparative advantage could be reversed i.ie. US may value computers a lot so import despite CA
50
Q

What are the similarities of the Ricardian and HO model?

A

• Common assumptions: 2 goods, 2 countries, factors mobile across industries and not mobile across countries, factors fully employed, identical preferences, free trade, balanced trade
• Trade pattern determined by relative prices ->OC
–>CA
• Both countries have overall gains from trade

51
Q

What are the differences between Ricardian and HO model?

A

(1) One factor in Ricardian model and two factors in HO model.
(2) Linear PPF in Ricardian and bowed out PPF in HO model: constant OC vs increasing OC.
(3) In Ricardian Model, tech differences are the basis of trade; in HO model, factor endowments are the basis of trade: CA vs HO Theorem
(4) Under free trade, there is specialization in Ricardian model and diversification in HO model.
(5) In Ricardian model, the only factor, labour, gains from trade. In HO model, there are two factors so winners and losers

52
Q

In reality, are labour intensities of an industry the same across countries?

A

Often not. E.g. shoe manufacturing in US has better tech so labour intensity less for same output as China with lower-tech and higher labour intensity

International economics (7 decks)

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