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Resources and Trade: The Heckscher-Ohlin Model
Resources and Trade: The Heckscher-Ohlin Model
Resources and
Trade: The
Heckscher-Ohlin
Model
2 aLC aLF 1
1= = > =
2 aKC aKF 3
– In the example, cloth uses one hour of labor for
every unit of capital while food uses 1/3 hour of
labor for every unit of capital in production.
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
5-6
Production Possibilities
– Implies that food production uses capital
relatively intensively:
3 aKF aKC 2
3= = > = =1
1 aLF aLC 2
– So each factor is used relatively intensively in
the production of a good and each good uses a
factor relatively intensively (no ties).
Total amount
aLCQC + aLFQF ≤ L of labor
aLCQC + aLFQF = L
2QC + QF = 2000
QF = 2000 − 2QC
aKCQC + aKFQF = K
2QC + 3QF = 3000
2
QF = 1000 − QC
3
1000
500
Capital
0
0 750 1000 1500 2000
Yards of cloth
aLCQC + aLFQF = L
4QC + QF = 200
QF = 200 − 4QC
aKCQC + aKFQF = K
2QC + 3QF = 300
2
QF = 100 − QC
3
200
Labor
Pounds of food
100
80
Capital
0
0 30 50 150 225
Yards of cloth
*
2 2000 L L 2000 1
= = > * = =
3 3000 K K 4000 2
– In the example, Home has 2/3 labor per unit of capital
while Foreign has less (½).
– Foreign is scarce in labor relative to capital.
2000
Labor
Pounds of food
1333
1000
500 Capital*
Capital
0
0 500 750 1000 1500 2000
Yards of cloth
*
2QC + 3QF
*
= 450
2 *
*
QF = 150 − QC
3
*
30 QC QC 15
= > *
=
80 QF QF 140
200
Labor
150
Pounds of food
140
100
80
Capital*
Capital
0
0 15 30 50 150 225
Yards of cloth
200 L L* 200
= > * =
300 K K 450
4 aLC aLF 1
2= = > =
2 aKC aKF 3
• Cloth Pricing
aLCw + aKC r = PC
• Food Pricing
aLFw + aKF r = PF
aLCw + aKC r = PC
2w + 2r = 4
r = 2−w
aLFw + aKF r = PF
w + 3r = 4
4 1
r = − w
3 3
2 Cloth
Rent
1.3
1
Food
0
0 1 2 3 4
Wage
aLFw + aKF r = PF
w + 3r = 10
10 1
r = − w
3 3
aLCw + aKC r = A A
PCA
4w A + 2r A = 10
r A = 5 − 2w A
5 − 2w =
10 1 A
− w A r A = 5 − 2w A
r A = 5 − 2(1)
3 3
⎛ 1⎞ A 10
⎜ 2 − ⎟w = 5 − r =5−2
A
⎝ 3⎠ 3
5 A 5 r =3
A
w =
3 3
wA = 1
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
5-71
Exercise 5.3 Solutions
10
Rent
5 Cloth
3.3
3
Food
0
0 1 2.5 10
Wage
2w + 2r = 6
r = 3−w
4 1
3−w = − w r = 3−w
3 3
r = 3 − 2.5
⎛ 1⎞ 4
⎜ 1 − ⎟w = 3 − r = 0.5
⎝ 3⎠ 3
2 5
w=
3 3
w = 2.5
Copyright © 2012 Pearson Addison-Wesley. All rights reserved.
5-75
Example 5.4 Increase in Price of Cloth
1 w w′ 5 / 2
1= = < = =5
1 r r ′ 1/ 2
3 Cloth'
2 Cloth
Rent
1.3
1
0.5 Food
0
0 1 2 2.5 3 4
Wage
4w + 2r = 20
r = 10 − 2w
A
1 w w 4
= A < = =2
3 r r 2
10
Cloth'
Rent
5 Cloth
3.3
3 Food
2
0
0 1 2.5 4 5 10
Wage
• Tests on US data
– Leontief found that U.S. exports were less
capital-intensive than U.S. imports, even
though the U.S. is the most capital-abundant
country in the world: Leontief paradox.
• Tests on global data
– Bowen, Leamer, and Sveikauskas tested the
Heckscher-Ohlin model on data from 27
countries and confirmed the Leontief paradox
on an international level.