The Heckscher-Ohlin Model: Features, Flaws, and Fixes. I: What's the H-O Model Like? Alan V. Deardorff University of Michigan

Transcription

1 The Heckscher-Ohlin Model: Features Flas and Fixes : What's the H-O Model ike? Alan V. Deardorff University of Michigan

2 Themes of the 3 ectures The HO Model is largely ell behaved in 2 dimensions even hen you include trade costs n higher dimensions it is not so ell behaved especially hen you include trade costs Various modifications and extensions of the HO model offer some promise of making it behave better Nottingham 2

3 Outline of ecture Overvie of the H-O Model The 2 2 Model Without trade costs With trade costs The Model Conclusions from the 2 2( 2) Model Nottingham 3

4 H-O Overvie The Heckscher-Ohlin (H-O) Model Assumptions Homogeneous goods and factors Perfectly competitive market equilibrium throughout (goods and factors) Production functions Constant returns to scale Non-joint Factors Perfectly mobile across industries Perfectly immobile across countries Countries differ in factor endoments ndustries differ in factor intensities Nottingham 4

5 H-O Overvie The Heckscher-Ohlin (H-O) Model mplications Countries export goods that use intensively their abundant factors (H-O Thm) Trade dras factor prices closer together across countries becoming equal in certain circumstances (FP Thm) Trade changes real factor prices (S-S Thm) Benefiting oners of abundant factors Hurting oners of scarce factors Rybczynski Thm (output effects of factor accumulation) Nottingham 5

6 The Textbook 2 2 H-O Model Goods X Y Factors X is -intensive Goods are final goods Trade is Free and frictionless or Subject to simple constant trade costs per unit (perhaps iceberg ) Nottingham 6

7 The Textbook 2 2 H-O Model Analysis: xpanded erner Diagram shos Production Factor allocations Factor Prices Trade for given Goods prices Factor endoments Thus Full solution for small open economy Dependence on prices for large economy Nottingham 7

8 erner Diagram 1/ X=1/P X Y=1/P Y 1/ Nottingham 8

9 erner Diagram 1/ X=1/P X X Y 1/ Y=1/P Y Nottingham 9

10 erner Diagram xport 1/ X=1/P X X X C C = W Y Y C 1/ Y=1/P Y mport Nottingham 1

11 The Textbook 2 2 H-O Model Behavior f ndoments inside Diversification Cone Both goods produced Factor prices independent of endoments f ndoments outside Diversification Cone One good produced Factor prices depend on endoments Nottingham 11

12 The Textbook 2 2 H-O Model Sensitivity All variables (outputs trade factor prices) are uniquely determined and depend smoothly on ndoments Prices Adding trade costs vis a vis a single other country Creates range of orld prices for hich country does not trade Outside that range all variables depend smoothly on trade costs Nottingham 12

13 Nottingham 13 The Textbook 2 2 H-O Model Summary With free and frictionless trade: J P P Y X P P T D S T Y X P P D D Y X P P S S Y X j J Y X Y X Y X ) ( ) / ( ) ( ) / ( ) / (??????????

14 Nottingham 14 The Textbook 2 2 H-O Model Summary With iceberg trade costs t: J t t P P Y X t t P P T D S T Y X t t P P D D Y X t t P P S S Y X Y X j J Y X Y X Y X Y X Y X Y X ) ( ) / ( ) ( ) / ( ) / (??????????

15 ffects of ncreasing Capital ndoment 1/ X=1/P X cone Y=1/P Y 1/ Nottingham 15

16 ffects of ncreasing S X S X Rybczynski Th m : S X / rises ith cone Nottingham 16

17 ffects of ncreasing S Y S Y Rybczynski Th m : S Y Falls ith cone Nottingham 17

18 ffects of ncreasing D X D Y D X D Y cone Nottingham 18

19 ffects of ncreasing T X T Y T X cone T Y Nottingham 19

20 ffects of ncreasing cone Nottingham 2

21 ffects of ncreasing abor ndoment 1/ X=1/P X Y=1/P Y ffects are mirror image of increasing 1/ Nottingham 21

22 ffects of ncreasing Price of X P X 1/ X=1/P X Y=1/P Y 1/ Nottingham 22

23 ffects of ncreasing Price of X P X 1/ X=1/P X Y=1/P Y 1/ Nottingham 23

24 ffects of ncreasing Price of X P X 1/ X=1/P X Y=1/P Y 1/ Nottingham 24

25 ffects of ncreasing Price of X P X S X S X (cone) P X Nottingham 25

26 ffects of ncreasing Price of X P X S Y S Y (cone) P X Nottingham 26

27 ffects of ncreasing Price of X P X D X D Y D Y D X (cone) P X Nottingham 27

28 ffects of ncreasing Price of X P X T X T Y T X P X T Y (cone) Nottingham 28

29 ffects of ncreasing Price of X P X Stolper-Samuelson Th m : /P X /P Y rise ith P X (cone) P X Nottingham 29

30 ffects of ncreasing Price of X P X Stolper-Samuelson Th m : /P X /P Y fall ith P X (cone) P X Nottingham 3

31 ffects of ncreasing Price of Y P Y ffects are mirror image of increasing P X Nottingham 31

32 ffects of Presence of Trade Costs Assume iceberg trade cost t-1> equals fraction of each good that disappears in transit to orld market (must ship t for 1 to arrive) mplication for domestic prices if orld prices are P X P Y : f country exports X: P X =P X /t; P Y =tp Y f country exports Y: P Y =P Y /t; P X =tp X f country does not trade: (P X /P Y )/t 2 = P X /P Y = t 2 (P X /P Y ) Nottingham 32

33 Presence of Trade Costs 1/ X=1/P X C Y=1/P Y 1/ Nottingham 33

34 Presence of Trade Costs 1/ X=1/P X f country exports X hich it ill if endoment is above this line CX C Y=1/P Y 1/ Nottingham 34

35 Presence of Trade Costs 1/ X=1/P X C CY f country exports Y hich it ill if endoment Y=1/P Y is belo this line 1/ Nottingham 35

36 Presence of Trade Costs 1/ X=1/P X f country exports X autarky CX C CY f country exports Y Y=1/P Y 1/ Nottingham 36

37 ffects of ncreasing in Presence of Trade Costs 1/ X=1/P X f country exports X CX C CY autarky f country exports Y Y=1/P Y 1/ Nottingham 37

38 ffects of ncreasing in Presence of Trade Costs P X /P Y autarky t 2 P X /P Y P X /P Y t 2 Y-export cone X-export cone Nottingham 38

39 S X ffects of ncreasing in Presence of Trade Costs autarky Y-export cone X-export cone Nottingham 39

40 S Y ffects of ncreasing in Presence of Trade Costs autarky Y-export cone X-export cone Nottingham 4

41 ffects of ncreasing in Presence of Trade Costs T X T Y autarky T X T Y Y-export cone X-export cone Nottingham 41

42 ffects of ncreasing in Presence of Trade Costs autarky Y-export cone X-export cone Nottingham 42

43 ffects of ncreasing P X /P Y in Presence of Trade Costs S X S Y autarky S X (? A =P XA /P YA = autarky price) Y-export cone? A X-export cone S Y? =P X /P Y Nottingham 43

44 ffects of ncreasing P X /P Y in Presence of Trade Costs D X D Y autarky D Y Y-export cone? A X-export cone D X? =P X /P Y Nottingham 44

45 ffects of ncreasing P X /P Y in Presence of Trade Costs T X T Y autarky T X? A? =P X /P Y T Y Y-export cone X-export cone Nottingham 45

46 ffects of ncreasing P X /P Y in Presence of Trade Costs /P Y autarky /P Y Y-export cone? A X-export cone? =P X /P Y Nottingham 46

47 ffects of ncreasing P X /P Y in Presence of Trade Costs /P Y autarky /P Y Y-export cone? A X-export cone? =P X /P Y Nottingham 47

48 ffects of ncreasing Trade Costs As trade cost t rises from zero Y-export cone and the X-export cone move further apart and the autarky range of factor endoments and orld prices gets larger For any given endoment and orld prices a rise in t reduces the volume of trade and moves other variables in the direction of their autarky values. Nottingham 48

49 ffects of ncreasing Trade Costs xample: Consider a country hose factor endoments have it completely specialized in good X at orld prices Nottingham 49

50 ffects of ncreasing Trade Costs: xample S X S Y autarky S X S Y X-export cone Nottingham 5 t

51 Nottingham 51 The World Market: The Textbook H-O Model To model the orld economy add a second country (country * ) Solve for orld (relative) price that clears the orld market ) / ( ) / ( * * * Y X X Y X X P P T P P T??

52 Nottingham 52 The World Market: The Textbook H-O Model Results ith analogous expressions for the other country J P Y X T T Y X D D Y X S S Y j J ) ( ) ( ) ( ) ( * * * * * * * *????????

53 The World Market: The Textbook H-O Model Depictions of orld equilibrium Offer curves (Meade) ntegrated-orld-economy diagram (Dixit-Norman) Sufficient (but not elegant) to use supply and demand of just one of the goods Nottingham 53

54 T X -T X * World quilibrium T X (P X /P Y ) P X /P Y -T X * (cone) (cone)* Nottingham 54

55 Conclusions from the 2 2( 2) H-O Model quilibria are ell defined quilibrium quantities are unique quilibrium prices are unique up to a numeraire Nottingham 55

56 Conclusions from the 2 2( 2) H-O Model ncludes three types of equilibria Autarky (hen there are trade costs) Diversified Specialized Determinants of equilibrium type are mostly clear Several relationships beteen variables depend importantly on type of equilibrium Nottingham 56

57 Conclusions from the 2 2( 2) H-O Model Classic Theorems are clear and precise Countries specialize but only if endoment differences are large Prices and quantities vary continuously ith exogenous changes in ndoments Trade costs n particular trade responds sensibly to Prices and Trade costs Nottingham 57

58 What s Next? My point in the next lecture ill be that some of these attractive properties are lost in higher dimensions i.e. especially hen there are more than 2 of goods and countries Nottingham 58