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Topic 1 H-O Theory
Topic 1 H-O Theory
ECU 07411
1 Heckscher online
theory
2
Chapter 2: Trade and Technology: The Ricardian Model
Prepared by:
Linus Lugaiyamu
The institute of finance management
FIGURE 4-1
Home preferences are summarized by the The Home no-trade (or autarky)
indifference curve, U. equilibrium is at point A.
The flat slope indicates a low relative
price of computers, (PC /PS)A.
The height of this triangle is the Home In panel (b), we show Home
imports of shoes (the difference between exports of computers equal to zero
the amount consumed of shoes and the at the no-trade relative price, (PC
amount produced with trade, QS3 − QS2). /PS)A,
and equal to (QC2 − QC3) at the
free-trade relative price, (PC/PS)W.
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Foreign Equilibrium with Free Trade
FIGURE 4-4 (1 of 2) International Free-Trade Equilibrium in Foreign
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
The height of this triangle is Foreign In panel (b), we show Foreign imports
exports of shoes (the difference between of computers equal to zero at the no-
the production of shoes and the amount trade relative price, (P*C /P*S)A*, and
consumed with trade, Q*S2 – Q*S3). equal to (Q*C3 − Q*C2) at the free-trade
relative price, (PC /PS)W.
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Equilibrium Price with Free Trade Because exports equal imports,
there is no reason for the relative price to change and so this is a free-
trade equilibrium.
FIGURE 4-5 Determination of the Free-Trade World Equilibrium Price
Heckscher-Ohlin Theorem:
Assumption 1: Labor and capital flow freely between the
industries.
Assumption 2: The production of shoes is labor-intensive
as compared with computer production, which is capital-
intensive.
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Leontief’s Paradox
less than the capital–labor ratio for imports, which is a paradoxical finding.
Leontief’s Paradox
Explanations
■ U.S. and foreign technologies are not the same, in
contrast to what the HO theorem and Leontief assumed.
■ By focusing only on labor and capital, Leontief ignored
land abundance in the United States.
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Stolper-Samuelson Theorem
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Factor Price equalization Theorem
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Factor Price equalization Theorem
Production Adjustment due to International Trade
• As the production of the good using the abundant
resource intensively increases, demand for that
resource will increase; so will the demand for the
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
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Factor Price equalization Theorem
Conclusion
1. International trade tends to reduce the pre-trade
difference in w and r between the two nations;
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
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Stolper-Samuelson Theorem
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Stolper-Samuelson Theorem
Implications
• Some groups in society will oppose international trade.
• Scarce factors will lobby government for
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
trade protection.
• Even though some in society lose, the country overall
benefits from international trade relative to autarky.
• A system of taxation and transfers could
be developed to compensate the losers
while leaving the gainers better off relative
to autarky.
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Rybczynski Theorem
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