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Heckscher-Ohlin (H-O)
Factor Proportions Theory
Econ 303
International Economics
SSU
Production of cloth under constant
opportunity cost
US Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards Cloth, yards
Bushels/yard
Bushels/yard
S
S
Wheat, bushels
Cloth, yards
S
Bushels/yard
Cloth, yards
Comparative advantages under increasing
opportunity cost
US Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards Cloth, yards
Sus
Srw
Bushels/yard
Bushels/yard
Wheat, bushels
Better
Cloth, yards
Bushels/yard
Cloth, yards
Production Possibility & Indifference Curves
Wheat, bushels
Cloth, yards
S
Bushels/yard
Cloth, yards
Demand as a source of trade
S
price
price
price
X’
X S
M
D D’
D
wine wine wine
Explaining Trade Patterns
• Classics:
– Trade is supply driven
– Constant return to scale
– One factor of production: labor
• Constant productivity of labor
Explaining Trade Patterns
• A More Complete Explanation
– Production differences (then supply) matters
– Consumption differences (then demand)
matters
– Market Structures (competition vs. monopoly
matters)
Explaining Trade Patterns
• Neo-Classical:
– Trade is supply and demand driven
• But, supply still is the determinant factor
– Decreasing returns to scale
– Many factors of production: labor, capital +
• Decreasing marginal productivity
Factor Proportions Theory
Heckscher-Ohlin (H-O)
• Assumptions
– Both countries have “access” to same technologies
• Two production sectors
– One is more labor intensive than the other sector
– The other sector is more capital (or land) intensive
• Two or more production factors
• Similar production functions
• Decreasing marginal productivities for each factor (others fixed)
• Decreasing returns to scale for all factors (all variable)
– Both countries have the same preferences
Factor Proportions Theory
Heckscher-Ohlin (H-O)
• Assumptions (cont)
– But each country has different factor
proportions:
• Example: One country is more labor abundant than
the other
Factor Proportions Theory
Heckscher-Ohlin (H-O)
• Propositions
– A country will choose to produce more in the
sector which is more intensive in the factor that
is more abundant.
Capital
Labor Labor
Wheat, bushels
Wheat, bushels
Cloth, yards Cloth, yards
Production and Consumption
Supply and Demand: Equal Case
US Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards Cloth, yards
Sus Srw
Bushels/yard
Bushels/yard
Dus Drw
Cloth, yards Cloth, yards Cloth, yards
Resource Endowment and Domestic Production
Pattern : Different Factor Proportions
US
Rest of the World
Capital
Capital
Labor Labor
Wheat, bushels
Wheat, bushels
Cloth, yards Cloth, yards
Supply and Demand under Different Factor
Proportions: International Trade
US Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards Cloth, yards
Sus
Srw
Bushels/yard
Bushels/yard
X
M
Cloth, yards Cloth, yards Cloth, yards
This is the Heckscher-Ohlin
theorem: