Endowment differences: The Heckscher-Ohlin model

Transcription

1 Endowment differences: The Heckscher-Ohlin model Robert Stehrer Version: April 7, 2013

2 A difference in the relative scarcity of the factors of production between one country and another is thus a necessary condition for a difference in comparative costs and consequently for international trade. A further indispensable condition is that the proportions in which the factors of production are combined shall not be the same for one commodity or for another (Heckscher, 1919) The fact that the productive factors enter into the production of different commodities in very different proportions, and that therefore (relative prices of the factors being different in different countries) an international specialization of production is profitable, is so obvious that it can hardly have escaped notice. Yet this fact was so long ignored in international trade theory. There can hardly be any other explanation than the dominance of the Ricardian labor cost theory. [...] This assumption precludes the study of varying proportions. In a consistent mutual interdependence theory of the international aspects of pricing, however, the idea is necessary and self-evident. (Ohlin, 1933).

3 Assumptions 2 input factors: capital K and labor L fixed supply but varying across countries mobile across industries immobile across countries 2 industries (Cloth and Food) differ in factor intensity (at any relative factor prices) K C L C > K F L F... Cloth industry is capital intensive Identical and homothetic preferences across countries U = U(C, F ) Countries differ in relative endowments but not in technology K L > K L... home country is (relatively) capital-abundant Resource differences are the only source of trade

4 Equilibrium in autarky Ricardo Heckscher-Ohlin y 2 y 2 L/a 2 p 1/p 2 L/a 1 y 1 y 1 Production possibility frontier (PPF) becomes convex Relative price is determined only in conjunction with demand

5 Comparing 2 countries in autarky Assume identical and homothetic preferences across countries Assume cloth industry (1) is capital-intensive Assume home country is capital abundant Equilibria in autarky y 2 Home country y 2 * Foreign country y 1 y 1 *

6 Capital abundant country (home) produces relatively more of capital intensive good: y 1 > y 1 Q C y 2 y2 or > Q C Q F QF Relative price of capital intensive good is lower in capital abundant country: p 1 p 2 < p 1 p 2 or P C P F < P C P F Capital abundant country has comparative advantage in capital intensive good

7 Free trade (small country assumption) Ricardo Heckscher-Ohlin y 2 y 2 Consumption point L/a 2 Consumption point Imports Imports Production point Exports Production point Exports L/a 1 y 1 y 1 If p 1 p > p1 2 p 2 country specializes in production of good 1 (comparative advantages) However, only incomplete specialization Exports good 1; imports good 2 Gains from trade

8 Two trading economies (remember Ricardo) y 2 Home country y 2 * Foreign country L*/a 2 * L/a 2 L/a 1 y 1 L*/a 1 * y 1 *

9 Two trading economies y 2 Home country y 2 * Foreign country Imports Exports Exports Imports y 1 y 1 * Both countries specialize according to their comparative advantages Both countries gain from trade

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11 Assumptions: 2 goods Cloth C (measured in yards) Food F (measured in calories) 2 factors Labor L (measured in hours) with income w Land T (measured in acres) with income r Input coefficients: a TC, a LC, a TF, a LF a ij... quantity of factor i used to produce good j inputs per unit of output depend on relative factor prices

12 Input possibilities Food production Cloth production a TF Input combinations that produce one unit of food a TC Input combinations that produce one unit of cloth Slope = -w/r a LF a LC Land to labor ratio in production not constant The higher is w/r the higher is land to labor ratio Land to labor ratio is always higher in food than in cloth production (assumption)

13 Factor price and input choice Factor prices and input choice w/r CC FF T/L At any relative factor price w/r the land to labor ratio is higher in food production Factor intensity reversal is ruled out (by assumption)

14 Mobility of labor and capital between sectors Perfect competition in goods market: prices equals costs of production p C = a LC w + a TC r p F = a LF w + a TF r A change in price of labor w has larger effect on price of labor intensive good (cloth) One-to-one relationship (positive) between w/r and p c /p F ( pc ) ( ) ( ) ( ) 1 ( ) ( ) alc a = TC w alc a TC pc w = p F a TF r a TF p F r a LF a LF

15 Product price, factor price and input choice Factor prices and goods prices SS w/r Factor price and input choice CC FF p C /p F T/L Relative price of goods linked to land-labor ratio in production Stolper-Samuelson effect: Relationship between goods and factor prices (see Stolper and Samuelson, 1941)

16 Effects on income distribution Increase in relative price of cloth (p C /p F ) will increase relative wage-rental ratio w/r Even stronger: Such a price change will unambiguously raise purchasing power of workers, i.e. real wages are rising (in terms of both goods) lower purchasing power of landowners, i.e. real rents are falling (in terms of both goods)

17 Strong distributional effects p C /p F increasing w/r increasing T /L increasing (or L/T decreasing) in both industries Marginal product of labor is increasing in both industries land is decreasing in both industries In competitive economy the marginal product of each factor equals its real price (f j ) L w p j j = F, C (f j ) T w p j j = F, C

18 Resources and output Assume that p C /p F is given Determines w/r and T j /L j Economy fully employs resources (L C + L F = L; T F + T F = T )

19 Allocation of resources Total supply of land T L F O F C T C T F F Resource allocation O C L C Total supply of labor L Slope of line C: T C /L C Slope of line F: T C /L C Slope of line F is steeper as land-to-labor ratio is higher in food production Thus, given product prices the allocation of resources is identified

20 Allocation of resources: Increase in supply of land Total supply of land T O' F C T C T F F Resource allocation O C L C Total supply of labor L At constant prices p C /p F Fall in output of labor intensive good C Increase in output of land intensive good F Land and labor no longer used in cloth production will be used in food production Output of food production rises more than proportionally

21 Resources and production possibilities Increase in supply of labor Increase in supply of land Food Food* Cloth Cloth* At constant prices p C /p F Increase in supply of labor increases cloth production (in relative terms) Increase in supply of land increases food production (in relative terms) Rybczynski effect (see Rybzynski, 1955)

22 Effects of international trade 2 countries with Same tastes (identical relative demand) Same technology: y i = f i (K i, L i ) and yi Differences in factor endowments L T > L T = f i (K i, L i ) i.e. home is labor-abundant and foreign is land-abundant (always defined in relative terms)

23 Autarky situation Home tends to produce more cloth (in relative terms) y C y F > y C y F Home tends to have lower relative price of cloth p C p F < p C p F thus, home has comparative advantage in cloth production Wage-rental ratio is lower in home country w r < w r

24 Specialization patterns and trade structures Home country Foreign country Food Food* Imports Exports Exports Imports Cloth Cloth* Labor abundant country specializes in labor intensive good Labor abundant country exports labor intensive good and imports land intensive good

25 World prices and distributional effects Factor prices and goods prices SS w/r Factor price and input choice CC FF p C /p F T/L Wage-rental ratio in labor abundant country (home) is rising Relative prices converge Relative factor incomes converge

26 Conclusions Countries tend to export goods whose production is intensive in factors with which they are abundantly endowed. Owners of a country s abundant factors gain from trade, but owners of a country s scarce factor lose. In labor abundant country Real income of labor is increasing Real income of landowners is decreasing In land abundant country Real income of labor is decreasing Real income of landowners is increasing

27 Factor contents of trade Model predicts factor price equalization Labor abundant country exports goods with high labor content Thus labor is embodied in (net) exports This view of trade in factor services can be used to explain factor price equalization However factor price convergence is hardly observed. The prediction relies on some crucial assumptions Both countries produce both goods Technologies are the same Trade equalizes prices of goods