Introduction to the Heckscher-Ohlin Model

A model in economics that explains international trade based on differences in the relative abundance of factors of production (like labor, capital, land) across countries.

The relative amount of different factors of production, like labor and capital, that a country possesses.

The amount of each factor of production (labor and capital) used to produce one unit of a good.

The curve representing all possible combinations of two goods that can be produced with a given amount of factors of production.

In the Heckscher-Ohlin model, the opportunity cost of producing one good in terms of another is not constant, meaning the PPF is curved, not a straight line.

The Heckscher-Ohlin model predicts that countries will export goods that use their relatively abundant factor of production more intensively.

The principle that factors of production will move between sectors until their returns (wages and rental rates) are equalized.

A country's trade pattern changes as its factor endowments change.

A good is considered labor-intensive if it uses more labor relative to capital in its production compared to other goods. It implies that the industry is more reliant on labor than capital to produce its output.

A good is considered capital-intensive if it uses more capital relative to labor in its production compared to other goods. It indicates that the industry relies more on machinery and equipment than human labor to produce its output.

The relative factor demand curve showcases the relationship between the price of factors (like wages and rent) and the demand for those factors in specific industries. It helps to understand how industries adjust their input usage in response to changes in factor prices.

In competitive markets, the price of a good is determined by its cost of production, which is influenced by the prices of factors (like labor and capital). If the cost of factors changes, it alters the price of the goods produced.

The Stolper-Samuelson theorem explains that if the relative price of a good increases, the real wage or rental rate of the factor intensively used in that good's production rises, while the real wage or rental rate of the other factor falls. This means changes in goods prices impact the distribution of income between labor and capital owners.

When the relative price of a good rises, the wage-rental ratio also increases, leading industries to use less labor relative to capital in their production. As a result, the labor-capital ratio used in the production of both goods decreases.

The relative price of a good is determined by its cost of production. For a good with a higher relative cost of labor (w/r), the relative price (PC/PF) will be higher. This means that a good produced using relatively more labor will be more expensive.

The real wage represents the amount of goods and services that a worker can purchase with their wage earnings. Changes in the wage-rental ratio due to changes in the relative prices of goods can affect the real wages of workers.

The country that is abundant in a factor exports the good whose production is intensive in that factor.

With trade, the relative price of the good that uses the abundant factor will rise in the abundant country and fall in the scarce country.

Trade leads to a convergence of relative prices between countries.

When the relative price of cloth increases, workers' income rises relative to capital owners' income. This means that workers gain a larger share of the total income.

When the relative price of cloth increases, the ratio of capital to labor used in both the cloth and food industries rises. This means that more capital is used relative to labor in both industries.

A higher ratio of labor to capital in an economy leads to greater production of cloth relative to food. This is because cloth is relatively labor-intensive, meaning it uses more labor than capital in its production.

The production possibility frontier (PPF) is a graphical representation of the maximum combinations of two goods that an economy can produce using all of its available resources. When the labor force grows, the PPF shifts outwards disproportionately towards cloth production, as cloth is relatively labor-intensive.

An economy with a higher ratio of labor to capital will be relatively more efficient in producing cloth compared to an economy with a lower ratio of labor to capital. This is because cloth is relatively labor-intensive.

An increase in the labor force (L) relative to capital (K), represented as L/K, leads to an expansion of production possibilities biased towards cloth. This is because cloth is relatively labor-intensive, and the increased labor allows for more cloth production.

To employ the additional workers resulting from an increase in the labor force, the economy expands production of the relatively labor-intensive good (cloth) and contracts production of the relatively capital-intensive good (food).

In the short term, after trade liberalization, factors of production may not immediately move to industries that intensively use abundant factors. This means that the productivity of these factors is determined by their current use, resulting in potential wage and rental rate differences across countries.

The Heckscher-Ohlin model predicts that, in the long run, wages (for labor) and rental rates (for capital) will equalize across countries. This is due to the movement of factors of production towards industries where they are most efficiently used, leading to international convergence of factor prices.

The table shows that countries with higher hourly manufacturing wages in 2015, like Germany and Japan, likely have more abundant capital, while countries with relatively lower wages, like Brazil and China, likely have more abundant labor.

Trade liberalization can lead to short-term wage and rental rate differences across countries, as factors take time to adjust. This can be observed through international wage disparities, as seen in Table 5.1.

A country will tend to export goods that make heavy use of its abundant factors of production, and import goods that use its scarce factors intensively.

Changes in relative prices due to international trade can affect the earnings of different factors of production, benefiting owners of abundant factors and hurting owners of scarce factors. For instance, a rise in the price of cloth might increase wages but lower the returns to capital.

The Heckscher-Ohlin model suggests that international trade can lead to equal factor prices across countries. This happens because trade equalizes relative output prices, which then influence factor prices.

In reality, factor prices are not fully equalized across countries. This is because the Heckscher-Ohlin model makes several simplifying assumptions, such as identical production methods and no trade barriers, which don't hold true in the real world.

Owners of abundant factors in a country gain from international trade, while owners of scarce factors lose. For instance, if a country is abundant in labor, workers might benefit from trade.

Factors of production used intensively by industries that are hurt by trade, like import-competing industries, also suffer losses, regardless of the sector they are employed in. For example, if a country imports cheap textiles, the domestic textile workers might face unemployment.

The opening of trade can increase demand for goods produced by relatively abundant factors, leading to higher prices for these factors. If a country has abundant labor, the demand for labor-intensive goods might rise, resulting in higher wages.

Factors of production, such as labor and capital, are used in different proportions to produce different goods. This variation in factor intensity can explain the pattern of trade between countries.