SPECIAL ISSUES IN INTERNATIONAL ECONOMICS

(code 164004-ENG)

Resources and Comparative Advantage

Academic Year 2024/2025 Anna M. FALZONI

 Plan for Today

 Where we are?

The Family Tree of Trade Models

 The Factor Proportions Model

(Heckscher-Ohlin Model – H-O model)

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 The Family Tree of Trade Models

Reasons for Trade

Comparative Advantage - Increasing returns to scale –

Perfect competition Imperfect competition

Countries differ by: External increasing

returns

Internal increasing returns

– Monopolistic competition
Technology
(Ricardian Model) Factor endowments
(Heckscher-Ohlin model)
 Sources of Comparative Advantage

• What determines comparative advantage?

• Answer: Many things
• Definition: Comparative
Advantage is
– a low price for a good,
– relative to other goods
– compared to other countries,
– in autarky.

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 The Heckscher-Ohlin Model
• The Factor Proportions Model
– Also called Heckscher-Ohlin Model
– Due to
• Eli Heckscher (1879-1952),
• Bertil Ohlin (1899-1979), and
• Paul Samuelson (1915-2009 )

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 The Heckscher-Ohlin Model
• The Factor Proportions Model
– Main idea:
• Comparative advantage is
determined by
– Factor endowments of countries,
together with
– Factor intensities of industries

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 The Heckscher-Ohlin Model
Implication of #1 and #2:
Heckscher-Ohlin Theorem:
Countries have comparative advantage in,
and therefore export,
goods that use relatively intensively
their relatively abundant factors

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 The Heckscher-Ohlin Model
Two differences drive trade in H-O Model
1. Countries differ in endowments of factors
– Labor
– Capital
– Land
– Skill (Human capital)
– Resources
2. Industries differ in factor intensities

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 The Heckscher-Ohlin Model
1. Countries differ in endowments of factors
2. Industries differ in factor intensities
Examples:
– Agriculture uses lots of land
– Textiles & apparel use lots of unskilled labor
– Autos use lots of capital
– Computers use lots of human capital

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 Industries differ in factor intensities

2-Digit SIC (Standard Industrial Classification) Codes

D. Manufacturing
20 Food & Kindred Products
21 Tobacco Products
22 Textile Mill Products
23 Apparel & Other Textile Products
24 Lumber & Wood Products
25 Furniture & Fixtures
26 Paper & Allied Products
27 Printing & Publishing
28 Chemical & Allied Products
29 Petroleum & Coal Products
30 Rubber & Miscellaneous Plastics Products
31 Leather & Leather Products
32 Stone, Clay, & Glass Products
33 Primary Metal Industries
34 Fabricated Metal Products
35 Industrial Machinery & Equipment
36 Electronic & Other Electric Equipment
37 Transportation Equipment
38 Instruments & Related Products
39 Miscellaneous Manufacturing Industries

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Markusen and Maskus, International Trade: Theory and
Applications,forthcoming.
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Markusen and Maskus, International Trade: Theory and
Applications,forthcoming.
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 The Heckscher-Ohlin Model

Heckscher-Ohlin Theorem:
Countries have comparative advantage in,
and therefore export,
goods that use relatively intensively
their relatively abundant factors

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ASSUMPTIONS

a) 2 goods, X e Y, 2 countries, H and F, 2 production factors, capital (K) and labor (L);

b) Production factors are fully employed, are freely mobile across sectors and immobile across
countries;

c) Countries share the same technology. Home is K-abundant and Foreign is L-abundant,
namely:

(K/L)Home> (K/L)Foreign

d) Production functions are constant returns to scale (CRS). Good Y is K-intensive relative to X
(X is L-intensive relative to Y). namely:

KY/LY > KX/LX

for any (w/r), where w and r denote the prices of factor L and factor K, respectively;

e) Goods markets and factor markets are perfectly competitive;

f) Preferences of the representative consumer are identical and homothetic across countries;

g) Trade is balanced.

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 The Heckscher-Ohlin Model
• Intuition
– Abundant factors are cheap (in autarky)
– Cheap factors produce cheap goods
– Hence comparative advantage

• Crucial for the model:

– Factors (labor, capital, etc.) are perfectly mobile within a
country across industries
– Thus all labor is paid the same wage – wages, etc., do
not differ by industry.

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 Effects of Trade
(according to H-O Theory)
• Trade causes:
– Production: of export good
of import good
– Factors (labor, capital, etc.) to move industries:
toward export sector
– Industries expand, contract, or may disappear
(as in Ricardian model)
– Factor demands: for abundant factor
for scarce factor
– Factor prices: of abundant factor
of scarce factor
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 Effects of Trade
(according to H-O Theory)
• Two important implications for factor prices:
– Factor Price Equalization
• Trade causes prices of factors in different countries to move
together, even to become equal across countries
– Stolper-Samuelson Theorem
• Real price (i.e., wage in terms of goods it can buy) of a country’s
abundant factor rises due to trade
• Real price (wage) of its scarce factor falls

NOTE: This means that there are losers from trade: the owners of a
country’s scarce factor.
(In the US and European countries, that is (unskilled) labor)

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 Effects of Trade
(according to H-O Theory)

• Because an economy can afford to consume more with trade, the

country as a whole is made better off.

• But some do not gain from trade, unless the model accounts for a
redistribution of income.

• Trade changes relative prices of goods, which have effects on the

relative earnings of workers and capital owners.

• The model predicts that owners of abundant factors gain with trade,
but owners of scarce factors lose.

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