SLIDES NOTES

RICARDOS THEORY
Countries want to trade because there are gains from doing so.
A country would tend to export the product it has comparative advantage in, and
imports that it has comparative disadvantage.

ASSUMPTIONS OF HO MODEL
Two goods, X and Y; two countries, H and F, and two factors, L and K.
Both countries have the same production technologies for X and Y
Production functions represent these technologies
These functions have two factors, say Labor and Capital, L and K
Each good use the two factors differently: one is intensive in L and the the other in K
Both countries have the same level of endowments in L and K; but H has more of one
factor while F has more of the other
Production technologies display constant returns to scale
The two representative consumers have the same utility functions, i.e. they have the
same demand functions for X and Y
Model Summary: Two good (X and Y), two countries (H and F), and two factor, L and K
Representative Consumers H and F
Same preferences and factor endowment
Many producers of X and Y in each country H and F
Use similar production technologies for X and Y
X and Y have different factor intensities
A country will tend to export its product that uses intensively its relatively abundant
factor.
FACTOR PRIZE EQUILIBRIUM THEOREM
If the relative product price of X and Y in both countries equalizes due to trade and
countries produce both goods, prices of non traded primary factors, L and K, are
equalized in both countries.
RYBCZNSKI THEOREM
At constant prices and provided both goods are produced, the relative increase of the
supply of a factor will increase the output of the product that uses it intensively and
reduces that of the other.
STOLPER-SAMUELSON THEOREM
Holding factor endowment constant, a rise in the relative price of one good will increase
the relative price of the factor used intensively in the production of the good, and reduce
that of the other.