Economics Dictionary of ArgumentsHome
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| Heckscher-Ohlin Model: The Heckscher-Ohlin Model is an economic theory of international trade. It proposes that countries export goods that intensively use the factors of production they have in relative abundance (e.g., labor or capital) and import goods that use factors they are relatively scarce in. It explains trade patterns based on differences in factor endowments, assuming identical technologies across countries. See also Economic models, International trade._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Robert C. Feenstra on Heckscher-Ohlin Model - Dictionary of Arguments
Feenstra I 1-1 Heckscher-Ohlin model/Feenstra: (…) the two-good, two-factor model (…) forms the basis of the Heckscher-Ohlin model. We shall suppose that the two goods are traded on international markets, but do not allow for any movements of factors across borders. This reflects the fact that the movement of labor and capital across countries is often subject to controls at the border and generally much less free than the movement of goods. Cf. >Ricardian model, >Economic models, >Tariffs, >International trade, >Import surveillance, >Export restraints. Feenstra I 2-1 Heckscher-Ohlin-Samuelson Model (HOS)/Feenstra: The basic assumptions of the HOS model (…) [are]: identical technologies across countries; identical and homothetic tastes across countries; differing factor endowments; and free trade in goods (but not factors). For the most part, we will also assume away the possibility of factor-intensity reversals. >Factor intensity reversals (FIR), >Factor price, >Production. Provided that all countries have their endowments within their “cone of diversification,” this means that factor prices are equalized across countries. >Endowments, >Heckscher-Ohlin theorem. We begin by supposing that there are just two countries, two sectors and two factors, (…). We shall assume that the home country is labor abundant, so that L / K > L* / K * . We will also assume that good 1 is labor intensive. The countries engage in free trade, and we also suppose that trade is balanced (value of exports = value of imports). Then the question is: what is the pattern of trade in goods between the countries? This is answered by: Heckscher-Ohlin Theorem: Each country will export the good that uses its abundant factor intensively. Thus, under our assumptions the home country will export good 1 and the foreign country will export good 2. To prove this, let us take a particular case of the factor endowment differences L / K > L* / K * , and assume that the labor endowments are identical in the two countries, L* = L, while the foreign capital endowments exceeds that at home, K* > K .* (…) we proceed by first establishing what the relative product price is in each country without any trade, or in autarky. Feenstra I 2-3 As we shall see, the pattern of autarky prices can then be used to predict the pattern of trade: a country will export the good whose free trade price is higher than its autarky price, and import the other. Demand: We have assumed a representative consumer with homothetic tastes, so we can use indifference curves to reflect demand. Feenstra I 2-6 Trade/factors: In addition to establishing the trade pattern, the HO model has precise implications about who gains and who loses from trade: the abundant factor in each country gains from trade, and the scarce factor loses. This result follows from (…) the Stolper-Samuelson theorem. >Stolper-Samuelson theorem. Factors: With the relative price of good 1 rising at home, the factor used intensively in that good (labor) will gain in real terms, and the other factor (capital) will lose. Notice that labor is the abundant factor at home. The fact that L / K > L* / K * means that labor would have been earning less in the home autarky equilibrium than in the foreign autarky equilibrium: its marginal product at home would have been lower (in both goods) than abroad. However, with free trade the home country can shift production towards the labor-intensive good, and export it, thereby absorbing the abundant factor without lowering its wage. Indeed, factor prices are equalized in the two countries after trade, (…). Thus, the abundant factor, whose factor price was bid down in autarky, will gain from the opening of trade, while the scarce factor in each country loses. Feenstra I 2-7 Examples: the United States is abundant in scientists, so it exports high-tech goods; Canada is abundant in land, so it exports natural resources, etc… VsHeckscher-Ohlin model: (…) it turns out that the HO model is a rather poor predictor of actual trade patterns, indicating that its assumptions are not realistic. It has taken many years, however, to understand why this is the case, (…) considering the earliest results of Leontief (1953)(1). >Leontief paradox. Feenstra I 2-15 Theorem of Leamer: The theorem of Leamer (1980)(2) states that if country 1 is labor-abundant, as illustrated, then the capital/labor ratio embodied in consumption must exceed the capital/labor ratio embodied in production. That is, since the consumption point Adi must lie on the diagonal, it is necessary above the endowment point Vi.** (…) note that it does not depend in any way on whether trade is balanced or not. For example, if country 1 is running a trade surplus (with the value of production exceeding consumption), then we should move the consumption point Adi to the left down the diagonal. This would have not effect whatsoever on the capital/labor ratio embodied in consumption as compared to the capital/labor ratio embodied in production. * Because of the assumptions of identical homothetic tastes and constant returns to scale, the result we are establishing remains valid if the labor endowments also differ across countries. ** For the graphics see Feenstra 2002(3). 1. Leontief, Wassily, W., 1953, Domestic Production and Foreign Trade: The American Capital Position Re-examined,” Proceedings of the American Philosophical Society, 97, September, 332-349. Reprinted in Readings in International Economics, edited by Richard Caves and Harry. G. Johnson, Homewood, IL: Irwin, 1968. 2. Leamer, Edward E., 1980, “The Leontief Paradox, Reconsidered,” Journal of Political Economy, 88(3), 495-503. Reprinted in Edward E. Leamer, ed. 2001, International Economics, New York: Worth Publishers, 142-149. 3. Robert C. Feenstra. 2002. Advanced International Trade. University of California, Davis and National Bureau of Economic Research August 2002. - - - Feenstra I 2-41 Heckscher-Ohlin model/Feenstra: (…) the complete tests of the HOV [Heckscher-Ohlin-Vanek] model fail sadly under the conventional assumptions of this model: identical homothetic tastes and identical technologies with FPE across countries. As we begin to loosen these assumptions, the model performs better, and when we allow for unlimited differences in productivities of factors across countries, as in Trefler (1993)(1), then the resulting HOV equations will hold as an identity. Between these two extremes, Trefler (1995)(2) shows that a parsimonious specification of technological differences between countries - allowing for a uniform difference with the U.S. - is still able to greatly improve the fit of the HOV equation. Recent research such as Davis and Weinstein (2001a)(3), which we review in the next chapter, generalizes these technological differences and further explains how we account for the differences between the factor content of trade and relative endowments. Feenstra I 2-42 (…) we can suggest two areas that deserve further attention. First, it is worth making a distinction between accounting for global trade volumes and testing hypotheses related to trade. When we attempt to match the right and left-hand sides of the HOV equation, such as by introducing productivity parameters, we are engaged in an accounting exercise. Second, even if we accept that the HOV equation can fit perfectly by allowing for sufficient differences between technologies across countries, this begs the question: where do these differences in technology come from? In the original work of Heckscher and Ohlin, they rejected the technology differences assumed by Ricardo in favor of a world where knowledge flowed across borders. We have since learned that this assumption of technological similarity across countries was empirically false at the time they wrote (see Estevadeordal and Taylor, 2000(4), 2001(5)), as well as in recent years (Trefler, 1993(1), 1995(2); Davis and Weinstein, 2001a(3)). So we are back in the world of Ricardo, where technological differences are a major determinant of trade patterns. Such differences can hardly be accepted as exogenous, however, and surely must be explicable based on underlying causes. Feenstra I 2-43 Increasing returns to scale might be one explanation, and this has been incorporated into the HOV framework by Antweiler and Trefler (2002)(6) (…). Economy-wide increasing returns are also suggested by the literature on “endogenous growth,” (…). >Exogenous growth, >Endogenous growth. Beyond this, some recent authors have argued that geography/climate (Sachs, 2001)(7), or colonial institutions (Acemoglu, et al, 2001)(8), or social capital (Jones and Hall, 1999)(9), or the efficiency with which labor is utilized (Clark and Feenstra, 2001)(10) must play an important role. 1. Trefler, Daniel, 1993, “International Factor Price Differences: Leontief was Right!” Journal of Political Economy, December, 961-987. 2. Trefler, Daniel, 1995, “The Case of Missing Trade and Other Mysteries,” American Economic Review, December, 85(5), 1029-1046. Reprinted in Edward E. Leamer, ed. 2001, International Economics, New York: Worth Publishers, 151-175. 3. Davis, Donald R. and David E. Weinstein, 2001a, “An Account of Global Factor Trade, American Economic Review, 91(5), December, 1423-1453. 4. Estevadeordal, Antoni and Alan M. Taylor, 2000, “Testing Trade Theory inn Ohlin’s Time,” in R. Findlay, L. Jonung and M. Lundahl, eds. Bertil Ohlin: A Centennial Celebration, 1899-1999, Cambridge, MA: MIT Press, forthcoming. 5. Estevadeordal, Antoni and Alan M. Taylor, 2001, “A Century of Missing Trade?” American Economic Review, forthcoming. 6. Antweiler, Werner and Daniel Trefler, 2002, “Increasing Returns and All That: A View from Trade,” American Economic Review, 92(1), March, 93-119. 7. Sachs, Jeffrey D., 2001. “Tropical Underdevelopment,” NBER Working Paper no. 8119. 8. Acemoglu, Daron, Simon Johnson and James A. Robinson, 2001, “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review, 91(5), December, 1369-1401. 9. Jones, Charles I. and Robert E. Hall, 1999, “Why Do Some Countries Produce So Much More Output Per Worker Than Others?” Quarterly Journal of Economics, 116(1), 83-116. 10. Clark, Gregory and Robert C. Feenstra, 2001, “Technology in the Great Divide,” NBER Working Paper no. 8596._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Feenstra I Robert C. Feenstra Advanced International Trade University of California, Davis and National Bureau of Economic Research 2002 |
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