The Heckscher-Ohlin Model assumptions
1.) Goods/commodities differ in their factor requirements (input requirements, so L or K intensive)
2.) Countries differ in their factor endowment (resources. L or K abundant)
-means we can have mutually beneficial trade. By changing one of these conditio
Assumption 13
There are two factors of production: Labor and Capital
-the price of L is wage
-the price of K is rent
-Implication: Labor and capital are no longer used in a fixed proportion
Assumption 14
Same available technology in two countries (different comparative advantage)
-Implication: The actual choice of a technology in the production depends on the relative price of K and L, which in turn depends on the relative abundance of K and L in the coun
Assumption 15
The rice production is always relatively more labor intensive than the computer production in the two countries
-Commodities differ in factor requirements
*needed to make trade possible
*implies increasing opportunity cost
Assumption 16
China is relatively more labor abundant than the U.S. (U.S. is K abundant based on H-O model assumptions)
-Countries differ in their factor endowments.
*needed to make trade possible
*implies increasing opportunity cost
Determining if Capital/Labor Abundant
-A country is labor (capital) abundant relative to another country if it has more (fewer) workers per machine than the other country
-A is capital abundant if Ka/La > Kb/Lb where Lk is work force and Kk is amount of machines available.
H-O compared to perfect competition/classical model
-no constant opportunity cost in the real world, so drop A11 and A12 from perfect competition model
=labor isn't the only factor of production
=input-output ratio is different
-In classical model, complete specialization. In H-O model, incomplete speciali
2 countries with unequal trade triangles will not trade in H-O model
With H-O, trade triangles change with changes in relative price.
if:
A B
exp > imp
imp > exp
then relative price will change.
-May be initially uneven, but equalize because of the change in relative price.
Rybczynski Theorem
At the constant world relative price, if a country experiences an increase in one factor, it will produce more of the product that uses this factor intensively
-ex: U.S. K ^ = computer prod ^
China L^ = rice prod ^
The factor-price equalization theorem
Free trade equalizes factor rewards between countries and thus serves as a substitute for external factor mobility
-Ex: R c = R u.s., W c = W u.s.
The Stolper-Samuelson Theorem
Free trade benefits the abundant factor but harms the scarce factor.