The Heckscher-Ohlin model

Transcription

1 The Heckscher-Ohlin model Sources: Mucchielli Mayer; Feenstra Taylor. Eleni ILIOPULOS Paris 1 Class 5 E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 1 / 29

2 Aim of this lecture Understand the Heckscher-Ohlin Model. Understand how the HO Model contrasts with the Ricardian model. Understand the No-Trade and the Free Trade equilibrium of the HO model. Understand the e ects of trade on factor prices. Understand how we can extend the Heckscher-Ohlin model. References: Mucchielli Mayer (2005); Feenstra Taylor (2008). E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 2 / 29

3 The model: basic assumptions Two countries: H, F Two goods: X, Y Two (homogeneous) factors: L, K Identical technologies in H and F for each good (but techx6=techy, of course!). Factor intensities di er from sector to sector: K x L x we suppose here K x L x > K y L y 6= K y L y.for instance, CRS No distortions to production and/or to perfect competition. Production factors are fully employed. Perfect factor mobility across sectors; however, factors do not cross borders. Identical and homogeneous preferences (same indi erence curves). Di erent factors endowments! suppose here K L h > K L f K L h 6= K L f. For instance, we E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 3 / 29

4 Specialization? 6= K y L y and K L K L f, Since K x L x h 6= countries have an incentive to produce the good that is intensive in the domestically abundant factor! Factor intensities: result of producers optimization program, for a given w r Technical coe cients can vary: a Lx = L x /X for a given w r. If w r! producers optimize and can change factor intensities (NB: factors can be substituted!) However, irreversibility of factor intensities among sectors (i.e., > K y L y ) K x L x E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 4 / 29

5 Equilibrium in autharky E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 5 / 29

6 Indi erence Curves Consumer tastes are the same across countries, so the shape of the indi erence curves is the same in each country. The tangencies with the two countries PPFs are di erent because of the di erent shapes of the PPFs. The relative price that consumers are willing to pay for computers equals the opportunity cost of producing them the no trade equilibrium. The slope at tangency equals the relative price of computers the steeper the slope, the higher the relative price of computers. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 6 / 29

7 Properties of autharky equilibrium: comparative advantage K x L x > K y L y and K L h > K L f entail: Home PPF biased in favor of X (computers) Foreign PPF biased in favor of Y (shoes). Identical preferences in H and F! the indi erence curves of both countries are parallel! Therefore, since PPFs are biased: Px P y a h < Px P y a f! country H has a comparative advantage in producing X.!Comparative advantage: determined by factors endowments and factor intensities. What if the size of country H changes? Comparative advantage is not a ected if stay xed. K L h E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 7 / 29

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9 Trade equilibrium with di erent autharky prices relative prices are equalized. relative prices allow markets to clear consumers are on higher indi erence curves Incomplete specialization (see the following slides) E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 9 / 29

10 Country H E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 10 / 29

11 International market for Home, good X E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 11 / 29

12 Country F E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 12 / 29

13 International market for Foreign, good X E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 13 / 29

14 International equilibrium for the good X E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 14 / 29

15 Equilibrium Price with Free Trade The equilibrium free trade price is determined by the intersection of the Home export supply curve and the foreign import demand curve: Point D. At that relative price, the quantity that Home wants to export equals the amount that Foreign wants to import. This is a free-trade equilibrium since there is no reason for the relative price to change. The trade triangles of the two countries are identical in size. Heckscher-Ohlin Theorem: With two goods and two factors, each country will export the good that uses intensively the factor of production it has in abundance, and will import the other good. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 15 / 29

16 Factors and prices: what happens if the relative price increase? E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 16 / 29

17 Factors and prices: what happens if the relative price increase? Sector Y frees some L and K but in a proportion such that: K L free < K x L x for an initial w r In order to absorb the additional labor (and substitute capital): w r # More precisely, if the (relative) price of one good increases, the income of the factor which is used intensively in its production increases as well. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 17 / 29

18 Factors income w r b < w r a!! E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 18 / 29

19 The Heckscher-Ohlin-Samuelson theorem: Under the above assumptions (and incomplete specialization, see the following), relative prices equalization (i.e., the existence of an unique international relative price) implies the international equalization of the relative income of factors, w/r. Thus, in equilibrium: There exist one unique relative price P x P y Each countriy will produce di erent quantities X, Y: Relative factor incomes are equalized internationally: Kx L x, Ky X Y w r h 6= = Kx h L x f = Ky h L y f The price-factors equalization will not hold IF for a given w r L y h = corresponding ratio K x L x, K y L y it is not feasible because of insu cient domestic factor endowment. In this case, the economy completely specializes in one sector. Thus, factors income are equalized IFF countries can keep their production diversi ed. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 19 / 29 the X Y w r f f

20 The cone of diversi cation E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 20 / 29

21 Complete specialization In H w a r a. In F: w f r f. Notice that: w a r a > w f r f E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 21 / 29

22 Empirical relevance: In reality, factors incomes are not equalized. Are the assumptions of the H-O-S theorem veri ed? Transportation costs do not allow to equalize good prices Tari s do not allow to equalize good prices Distortions that a ect perfect competition do not allow to equalize good prices Do countries have the same technology? Do factors have the same productivity all around the world? E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 22 / 29

23 The Stopler-Samuelson Theorem Under the above assumptions, an increase of the relative price of one good increases the real income of the factor intensively used in its production; it also entails a decrease in the real income of the other factor. Factors endowments are assumed to be xed. Ampli cation e ect: the increase in the real income of the factor (i.e., r w ) is greater than the one of the relative price of the factor-abundant good (i.e., P x Py ). Redistribution as an important issue for policy makers: is it better to let r or w increase? It follows from scarcity vs abundance of factors. If the production of one good cannot change (i.e., the country is completely specialized), the real income of factors cannot vary. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 23 / 29

24 The Theorem of Rybczynski If the relative price of goods is xed and countries are not completely specialized, the increase of the endowment of a factor entails an increase in the production of the good, which is intensive in that factor; it also entails a reduction in the production of the other good the one intensive in the other factor. Ampli cation e ect: the increase of the quantity of the good is greater than the increase in the quantity of the factor. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 24 / 29

25 The growth of a factor in a country and terms of trade If growth is biased in favor of the export sector ( K x L x ") and H is a large country! excess supply of X! Relative price of X decreases ( P x P y #)! ToT deteriorate! On the contrary, if growth is biased in favor of the import sector: ToT improve! Bhagwati (1985) stresses that developing countries may not bene t of factors growth in open economy. Small open economy: factors growth does not have e ect on ToT. Factor growth cannot but be bene cial If factors increase a lot you can have an inversion of specialization E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 25 / 29

26 Empirical relevance: the paradox of Leontief a = K imp/l imp K exp /L exp if the country is abundant in capital, a < 1. Is it the case? No.. (other tests have better results...still, they are not conclusive). Why? Land and natural resources are not accounted as production factors Tari s can bias results The year the test was done was close to the end of IIWW (data are biased) What if we account for labor productivity? (the possible solution of Leontief) E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 26 / 29

27 Empirical relevance: the paradox of Leontief The model Heckscher-Ohlin-Vanek (HOV): n factors, m goods and di erent countries. Focus on the service provided by factors (countries export the service provided by the abundant factor). In a two country framework (Vanek, 1968): if one country is abundant in one factor, it needs to be a net exporter of its services. Factor abundance: the share of a country s factor in world amount of that factor OVER the country s GDP share in world GDP. If specialization does not occur in more than n-m sectors and F 1 f 1 F 1 f 1.. F n f n if free trade, then the Home country will export services F 1, F 2, F j and import services F j+1, F j+2, F n (j 6= n) ; we can compute j, if we know the prices of factors. Results improve little.. See your book (MM) for more and more discussion.. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 27 / 29

28 Important corrections are needed (Tre er 1995; Davis et Weinstein, ): Home bias in agents preferences Di erent productivities (Ricardo?) Better data Transportation costs. Can H-O really explain intra-industry trade?? E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 28 / 29

29 The Stopler-Samuelson theorem and inequality in the North In the rich countries, the income gap between skilled and unskilled labor increases (or, where wages are not exible, unemployment of unskilled workers increases). At the same time, unskilled-labor-intensive goods are imported from poorer countries. However: Is it because of the Stopler-Samuelson e ect? The share of manufactures coming from developing countries into OECD countries is still very small (but increasing). Does inequality come from a biased growth in favor of technological progress? However, even if international trade may contribute to inequality, protectionism is not the solution. E. ILIOPULOS (Paris 1) The Heckscher-Ohlin model Class 5 29 / 29