The Heckscher-Ohlin-Samuelson
Theorem
• ECN 3891
• International Economics
- Honors
• Dr. Ali Moshtagh
The Classical and Neo-Classical
Models of International Trade
• The Classical model of international trade is based on the “Labor
Theory of Value”; it assumes only one factor of production, identical
technology between the two countries, identical tastes, etc.. The model
promotes specialization and requires complete specialization for at
least one country, due to constant opportunity costs.
• Given a concave production possibilities frontier, international trade
should lead to incomplete specialization, due to increasing costs.
• The Neo-Classical models of international trade assume more than one
factor of production. The Heckscher-Ohlin-Samuelson model (also
known as the Factor Endowment or the Variable Proportion Model) not
only describes the pattern of trade, but it also predicts the impact of
trade on the national income and returns to the factors of production.
Other Assumptions:
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•
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two countries, two factors, two products;
perfect competition in all markets;
Free trade;
Factors of production are available in fixed amounts in each country;
Full mobility of factors of production between industries within each
country;
Immobility of factors of production between countries;
The two countries are alike with respect to tastes;
Technology is available to both countries; and
Linear homogeneous production functions of degree one (constant
returns to scale).
The Heckscher-Ohlin Theorem
Critical Assumptions:
• Countries are characterized by different factor
endowments--a country is capital abundant if it
has a higher ratio of capital to other factors
than does its trading partner;
• There are different factor intensities between
products--a product is capital-intensive if, at
identical wages and rents, its production
requires more capital per worker than does the
other product.
The H-O Theorem
• Given identical production functions but different
factor endowments between countries, a country will
tend to export the commodity which is relatively
intensive in her relatively abundant factor
• In general, countries tend to have comparative
advantage in the products that are relatively intensive
in their relatively abundant factors
The Stolper-Samuelson Theorem:
Assumptions:
• One country produces two goods (wheat and cloth) with two factors of
production (capital and labor);
• neither good is an input into the production of the other;
• competition prevails;
• factor supplies are given;
• both factors are fully employed;
• both factors are mobile between sectors (but not between countries);
• one good (wheat) is capital-intensive and the other (cloth) is laborintensive);
• opening trade raises the relative price of the export good.
The Stolper-Samuelson Theorem
• moving from no trade to free trade raises
the returns to the factor used intensively in
the rising-price industry, and lowers the
returns to the factor used intensively in the
falling-price industry, regardless of which
goods the sellers of the two factors prefer to
consume
The Factor Price Equalization
Theorem
Assumptions:
• there are two countries using two factors of production producing two
products;
• competition prevails in all markets;
• each factor supply is fixed, and there is no migration between countries;
• each factor is fully employed in each country with or without trade;
• there are no transportation or information costs;
• free trade;
• production functions exhibit constant returns to scale, and are the same
between countries for any industry;
• production functions are not subject to factor intensity reversals; and
• both countries produce both products with or without trade.
The Factor Price Equalization
Theorem
• Free trade will equalize not only
commodity prices but also factor prices,
so that all workers earn the same wage
rate and all units of capital will earn the
same rental return in both countries
regardless of the factor supplies or the
demand patterns in the two countries
Hourly Pay in Manufacturing
Country
Germany
France
Japan
Taiwan
Mexico
Poland
Hourly Pay
(1990 U.S. = 100)
138
98
82
24
12
6
The Leontief Paradox
In 1953 Wassily Leontief published the results
of the most famous empirical investigations in
economics, an attempt to test the consistency of
the H-O Model with the U.S. trade patterns.
Leontief’s objectives were to prove that:
• the H-O Model was correct; and
• to show that the U.S. exports were capital
intensive
The Leontief Paradox
Leontief developed a 1947 input-output table
for the U.S. to determine the capital-labor
ratios used in the production of U.S. exports
and imports. Leontief found that the U.S.
exports used a capital-labor ratio of $13,991
per man year, whereas import substitutes used
a ratio of $18,184 per man year.
The Leontief Paradox
The key ratio of [( KX / LX ) / ( KM / LM )]
(13,991 / 1) / (18,184 / 1) = 0.77
was calculated. Given the presumption that the U.S.
was relatively capital abundant, that ratio was just the
reverse of what the H-O Model predicted. Thus, it is
called the Leontief Paradox.
International Factor Mobility
Labor
0
1
2
3
4
5
6
7
8
9
10
11
Output
0
20
39
57
74
90
105
119
132
144
155
165
Marginal
Product
20
19
18
17
16
15
14
13
12
11
10
In Home and Foreign there are two
factors of production, land and labor,
used to produce only one good. The
land supply in each country and the
technology of production are exactly
the same. The marginal product of
labor in each country depends on
employment as shown in the Table.
Initially, there are 11 workers employed
in Home, but only 3 in Foreign. Find
the effects of free movement of labor
from Home to Foreign on employment,
production, real wages, and the income
of land owners in each country.
Pre International Factor Mobility
Home:
• Employment = 11
• Production = 165
• Real Wage Rate = 10
• Real Wages = 110
• Real Rent = 55
Labor
0
1
2
3
4
5
6
7
8
9
10
11
Output
0
20
39
57
74
90
105
119
132
144
155
165
Marginal
Product
20
19
18
17
16
15
14
13
12
11
10
Pre International Factor Mobility
Labor
0
1
2
3
4
5
6
7
8
9
10
11
Output
0
20
39
57
74
90
105
119
132
144
155
165
Marginal
Product
20
19
18
17
16
15
14
13
12
11
10
Foreign:
• Employment = 3
• Production = 57
• Real Wage Rate = 18
• Real Wages = 54
• Real Rent = 3
Post International Factor
Mobility
Home:
• Employment = 7
• Production = 119
• Real Wage Rate = 14
• Real Wages = 98
• Real Rent = 21
Foreign:
• Employment = 7
• Production = 119
• Real Wage Rate = 14
• Real Wages = 98
• Real Rent = 21
Effects of International Factor
Mobility
Home:
• Employment = 11
• Production = 165
• Real Wage Rate = 10
• Real Wages = 110
• Real Rent = 55
Home:
• Employment = 7
• Production = 119
• Real Wage Rate = 14
• Real Wages = 98
• Real Rent = 21
Effects of International Factor
Mobility
Foreign:
• Employment = 3
• Production = 57
• Real Wage Rate = 18
• Real Wages = 54
• Real Rent = 3
Foreign:
• Employment = 7
• Production = 119
• Real Wage Rate = 14
• Real Wages = 98
• Real Rent = 21