CHAPTER 8:
DISTRIBUTION EFFECTS OF HOT
HECKSCHER-OHLIN MAIN ASSUMPTIONS
▪
Different factor endowments across countries:
•
Country A is capital (K) abundant relative to Country B.
•
Country B is labor (L) abundant relative to Country A.
𝐾
𝐾
𝐿 𝐴
𝐿 𝐴
𝑤
𝑤
Physical Units definitions: ( ) > ( )
𝑟
𝑟
Relative Price definitions: ( 𝑟 ) < ( 𝑟 ) OR (𝑤) < (𝑤)
𝐵
▪
𝐴
𝐴
𝐵
Different factor intensities between products – Similar technology (across countries)
•
Production of steels (Y) relatively L-intensive
•
Production of cloth (X) relatively K- intensive
𝐾
𝐾
(𝐿 ) > (𝐿 )
𝑋
▪
𝑌
Identical Demand Conditions (similar tastes across countries)
IMPLICATION IN AUTARKY EQUILIBRIUM
Relative price of Inputs:
𝑤
𝑤
( 𝑟 ) < ( 𝑟 ) OR
𝐵
𝐴
𝑟
𝑟
(𝑤) < (𝑤)
𝐴
𝐵
Relative price of Outputs:
<
(
𝑃𝑋 𝑨
𝑃𝑋 𝑩
) <( )
𝑃𝑌
𝑃𝑌
SITUATION AFTER ENGAGING IN INTERNATIONAL TRADE
▪
Country A
Country A is relatively capital (K)
abundant.
▪ Country B is relatively labour (L) scarce.
BEFORE TRADE:
▪
Country B
Country B is relatively labour (L) abundant.
▪
Country B is relatively capital (K) scarce.
BEFORE TRADE:
𝑃𝑋 𝑨
𝑃𝑋 𝑩
( ) <( )
𝑃𝑌
𝑃𝑌
𝑃𝑋 𝑨
𝑃𝑋 𝑩
( ) <( )
𝑃𝑌
𝑃𝑌
𝑃𝑌 𝐵
𝑃𝑌 𝐴
𝑋
𝑋
or ( ) < ( )
𝑃
𝑃
•
•
Country A has comparative advantage in
the production of X (cloths)
Country B has comparative disadvantage in
the production of Y (steels)
•
•
Country B has comparative advantage in
the production of Y (steels)
Country B has comparative disadvantage in
the production of X (cloths)
AFTER TRADE:
AFTER TRADE:
Process of specialization and implication on
relative price of inputs:
Process of specialization and implication on
relative price of inputs:
•
Country A increases the production of X –
X is capital intensive product → demand
for capital will increases → price of capital
(rental rate/r) rise
o Capital owner gains from trade
(Capital is anundance factor in
Country A)
•
Country B increases the production of Y – Y
is labour intensive product → demand for
labour increases → price of labour
(wages/w) rise.
o Labour/workers gains from trade
(Labour is abundance factor in
Country B)
•
Country A reduces the production of Y – Y
is labour intensive product → demand for
labour fall → price of labour (wages/w)
drop.
o Labour/workers loses from trade
(Labour is a scarce factor in Country
A)
•
Country B reduces the production of X – X
is capital intensive product → demand for
capital will fall → price of capital (rental
rate/r) drop
o Capital owner loses from trade
(Capital is scarce factor in Country
B)
HOW THE INCOMES OF DIFFERENT GROUPS WITHIN A COUNTRY CHANGE AS TRADE STARTS
Therefore:
▪ According to the Stolper-Samuelson
theorem:
▪ Country A is a relatively K-abundant
country
• who in Country A should favor free
trade? Capital owner favor free
trade
•
▪
▪
Therefore:
▪ According to the Stolper-Samuelson
theorem:
▪ Country B is a relatively L-abundant country
•
who in Country B should favor free
trade? Labor favor free trade
•
Who in Country B should favor
protectionism? Capital owner favor
protectionism
Who in Country A should favor
protectionism? Labor favor
protectionism
▪
the owners of the relatively abundant
factor will find their real incomes rising,
and,
the owners of the relatively abundant
factor will find their real incomes rising,
and,
▪
the owners of the relatively scarce factor
will find their real incomes falling.
the owners of the relatively scarce factor
will find their real incomes falling.
HOW THE FACTOR PRICES ACROSS COUNTRY CHANGE AS TRADE STARTS