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4
1
Heckscher-Ohlin
Model
Testing the
Heckscher-Ohlin
Model
Effects of Trade on
Factor Prices
APPENDIX TO
CHAPTER 4
The Sign Test in the
Heckscher-Ohlin
Model
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Introduction
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Introduction
Our second goal is to examine the empirical evidence
on the Heckscher-Ohlin model.
By allowing for more than two factors of
production and also allowing countries to differ in
their technologies, as in the Ricardian model, the
predictions from the Heckscher-Ohlin model
match more closely the trade patterns in the
world economy today.
The third goal of the chapter is to investigate how the
opening of trade between the two countries affects the
payments to labor and to capital in each of them.
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1 Heckscher-Ohlin Model
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1 Heckscher-Ohlin Model
Labor Intensity of Each Industry The demand for labor relative to
capital is assumed to be higher in shoes than in computers,
LS/KS > LC/KC.
These two curves slope down just like regular demand curves,
but in this case, they are relative demand curves for labor (i.e.,
demand for labor divided by demand for capital).
FIGURE 4-1
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1 Heckscher-Ohlin Model
Assumptions of the Heckscher-Ohlin Model
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APPLICATION
Are Factor Intensities the Same across
Countries?
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1 Heckscher-Ohlin Model
No-Trade Equilibrium
Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (1 of 3)
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1 Heckscher-Ohlin Model
No-Trade Equilibrium
Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (2 of 3)
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1 Heckscher-Ohlin Model
No-Trade Equilibrium
Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (3 of 3)
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Home Equilibrium with Free Trade
FIGURE 4-3 (1 of 2)
1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Home Equilibrium with Free Trade
FIGURE 4-3 (2 of 2)
1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Foreign Equilibrium with Free Trade
FIGURE 4-4 (1 of 2)
1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Foreign Equilibrium with Free Trade
FIGURE 4-4 (2 of 2)
1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Equilibrium Price with Free Trade Because exports equal imports,
there is no reason for the relative price to change and so this is a freetrade equilibrium.
FIGURE 4-5
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Pattern of Trade
Home exports computers, the good that uses
intensively the factor of production (capital) found
in abundance at Home.
Foreign exports shoes, the good that uses
intensively the factor of production (labor) found in
abundance there.
This important result is called the HeckscherOhlin theorem.
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1 Heckscher-Ohlin Model
Heckscher-Ohlin Theorem:
Assumption 1: Labor and capital flow freely between the
industries.
Assumption 2: The production of shoes is labor-intensive
as compared with computer production, which is capitalintensive.
Assumption 3: The amounts of labor and capital found in
the two countries differ, with Foreign abundant in labor and
Home abundant in capital.
Assumption 4: There is free international trade in goods.
Assumption 5: The technologies for producing shoes and
computers are the same across countries.
Assumption 6: Tastes are the same across countries.
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e.
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TABLE 4-1
Leontiefs Test
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Explanations
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HEADLINES
China Drawing High-Tech Research from U.S.
For years, many of Chinas best and brightest left for the
United States, where high-tech industry was more cuttingedge.
But Mark R. Pinto is moving in the opposite direction.
Mr. Pinto is the first chief technology officer of a major
American tech company to move to China. Applied Materials,
is one of Silicon Valleys most prominent firms. It supplied
equipment used to perfect the first computer chips.
Not just drawn by Chinas markets, Western companies are
also attracted to Chinas huge reservoirs of cheap, highly
skilled engineers.
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FIGURE 4-6
Country Factor
Endowments, 2000
Shown here are
country shares of six
factors of production
in the year 2000, for
eight selected
countries and the rest
of the world.
In the first bar graph, we see that 24% of the worlds physical capital in 2000
was located in the United States, with 9% located in China, 13% located in
Japan, and so on. In the final bar graph, we see that in 2000 the United States
had 22% of world GDP, China had 11%, Japan had 8%, and so on.
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e.
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FIGURE 4-7 (1 of 2)
China was abundant in R&D scientists in 2000 (since it had 14% of the worlds
R&D scientists as compared with 11% of the worlds GDP) but scarce in
effective R&D scientists (because it had 7% of the worlds effective R&D
scientists as compared with 11% of the worlds GDP).
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e.
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FIGURE 4-7 (2 of 2)
The United States was scarce in arable land when using the number of acres
(since it had 13% of the worlds land as compared with 22% of the worlds GDP)
but neither scarce nor abundant in effective land (since it had 21% of the
worlds effective land, which nearly equaled its share of the worlds GDP).
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e.
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TABLE 4-2
This table shows that U.S. food trade has fluctuated between positive and
negative net exports since 2000, which is consistent with our finding that the
United States is neither abundant nor scarce in land. Total agriculture trade
(including nonfood items like cotton) has positive net exports, however.
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Labor Endowment and GDP for the United States and Rest of World, 1947
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FIGURE 4-10
Relative
supply
Relative
demand
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FIGURE 4-11
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An increase in the
relative price of
computers shifts the
economy-wide relative
demand for labor, RD1,
toward the relative
demand for labor in the
computer industry, LC
/KC.
The new relative demand
curve, RD2, intersects
the relative supply curve
for labor at a lower
relative wage, (W/R)2.
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FIGURE 4-12 (2 of 2)
Relative supply
No change
Relative demand
No change in total
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Real
wage
falls
Real rental
increases
Real
rental
falls
Real
wage
increases
Real
rental
falls
Real
wage
increases
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APPLICATION
Opinions toward Free Trade
According to the specific-factors model, in the short run we
do not know whether labor will gain or lose from free trade,
but we do know that the specific factor in the export sector
gains, and the specific factor in the import sector loses.
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APPLICATION
Opinions toward Free Trade
We would expect that workers in export industries will
support free trade (since the specific factor in that industry
gains), but workers in import-competing industries will be
against free trade (since the specific factor in that industry
loses).
In the short run, then, the industry of employment of
workers will affect their attitudes toward free trade.
In the long-run Heckscher-Ohlin model, however, the
industry of employment should not matter.
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APPLICATION
Opinions toward Free Trade
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APPLICATION
Opinions toward Free Trade
An increase in the relative price of exports will benefit skilled
labor in the long run, regardless of whether these workers
are employed in export-oriented industries or importcompeting industries.
In the long run, then, the skill level of workers should
determine their attitudes toward free trade.
In a survey conducted in the United States by the National
Elections Studies (NES) in 1992, workers with lower wages
or fewer years of education are more likely to favor import
restrictions, whereas those with higher wages and more
years of education favor free trade.
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A PePyE NTDeI Xr m
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CHAPTER 4
FIGURE 4A-1
Factor Content of Trade for the United States, 1947 This table extends Leontiefs
test of the Heckscher-Ohlin model to measure the factor content of net exports.
The first column for exports and for imports shows the amount of capital or labor
needed per $1 million worth of exports from or imports into the United States, for
1947. The second column for each shows the amount of capital or labor needed
for the total exports from or imports into the United States. The final column is
the difference between the totals for exports and imports.
By taking the difference between the factor content of exports and the
factor content of imports, we obtain the factor content of net exports, shown
in the final column of Table 4A-1.
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e.
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CHAPTER 4
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CHAPTER 4
FIGURE 4A-2
The Sign Test for 33 Countries with Differing Technologies, 1990 This table
shows the sign test for the Heckscher-Ohlin model for 1990, allowing for
different technologies across countries. There are 33 countries included in
the study and 9 factors of production. All countries have more factors
passing the sign test than failing it, especially the low- and medium-income
countries. These results show that the sign test holds true when we allow
productivities to differ across countries.
Note: The countries with low GDP per capita are Bangladesh, Pakistan, Indonesia, Sri Lanka, Thailand,
Colombia, Panama, Yugoslavia, Portugal, and Uruguay. The countries with middle GDP per capita are
Greece, Ireland, Spain, Israel, Hong Kong, New Zealand, and Austria. The countries with high GDP per
capita are Singapore, Italy, the United Kingdom, Japan, Belgium, Trinidad, the Netherlands, Finland,
Denmark, former West Germany, France, Sweden, Norway, Switzerland, Canada, and the United States.
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e.
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