Trade Patterns:

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

Cloth, yards Cloth, yards Cloth, yards

Deriving supply curves under increasing
opportunity costs

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

Cloth, yards Cloth, yards Cloth, yards

Deriving demand curves from
indifference curves

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

USA International Market Rest of the World

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.

– Abundance is a relative concept: relatively

abundant
 Factor Proportions Theory
Heckscher-Ohlin (H-O)
• Countries export the products that use their
abundant factors intensively (and import the
products that use their scarce factors intensively).
• With no trade the relatively abundant production
factors will be relatively cheap, so that the product
that uses these factors relatively intensively will
have a low no-trade price. As trade is opened, this
product is exported.
 Resource Endowment and Domestic
Production Pattern: Equal Case
US
Rest of the World
Capital

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:

Each country exports the good intensive

in the country's abundant factor.