CHAPTER 4
Who Gains and Who
Loses from Trade
Short-run effects of opening trade
 For the short-run gains and losses divide by
output sector: All groups tied to rising
sectors gain, and all groups tied to declining
sectors lose.
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The long-run factor-price response
 In the long run, factors can move between
sectors in response to differences in returns.
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Figure 4.2
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Stolper-Samuelson theorem
Under certain conditions and assumptions,
in a long-run term, the real return to the
factor used intensively in the rising-price
industry increases, and the real return to the
factor used intensively in the falling-price
industry declines.
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Assumptions of the StolperSamuelson theorem
• An economy can produce two goods, cloth and
wheat.
• The production of these goods requires two
inputs that are in limited supply; labor (L) and
land (T).
• Production of wheat is land-intensive and
production of cloth is labor-intensive in both
countries.
• Perfect competition prevails in all markets.
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Specialized-factor pattern
Factors more specialized in the production of
exportable products (or rising-price products
more generally) tend to gain income, and
factors more specialized in the production of
import-competing products (or falling-price
products more generally) tend to lose
income. (For any number of factors and
products)
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Assumptions of The Factor-Price
Equalization Theorem
Both countries produce both goods
Both countries have the same
technologies in production
Both countries have the same prices of
goods due to trade
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The Factor-Price Equalization
Theorem
With the shift to free trade: For each factor, its rate
of return becomes more similar between countries.
Under ideal conditions, its real rate of return is the
same in different countries, even if factors cannot
migrate between countries directly.
Example:
Labor.
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The Factor-Price Equalization
Theorem
With no trade, the wage rate is high in the laborscarce country. The wage rate is low in the laborabundant country.
With free trade, the import of labor-intensive
products pushes the wage-rate down in the laborscarce country. The export of labor-intensive
products pulls the wage rate up in the laborabundant country.
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The Leontief Paradox
 The first serious attempt to test the H-O
theory was made by Professor Wassily W.
Leontief in 1954.
 Leontief reached a paradoxical conclusion
that the US (the most capital abundant
country in the world by any criterion)
exported labor-intensive commodities and
imported capital- intensive commodities.
This result has come to be known as the
Leontief Paradox.
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Empirical Evidence on the
Heckscher-Ohlin Model
Factor Content of U.S. Exports and Imports for
1962
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Testing the Heckscher-Ohlin Model
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Testing the Heckscher-Ohlin Model
 Implications of the Tests
Empirical evidence on the HeckscherOhlin model has led to the following
conclusions:
It has been less successful at explaining the
actual pattern of international trade.
It has been useful as a way to analyze the
effects of trade on income distribution.
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Questions
 Consider the following data on some of
Japan’s exports and imports in 2006,
measured in billions of U.S. dollars:
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Questions and problem
 For which of these products do Japan’s
exports and imports appear to be consistent
with the predictions of the Heckscher-Ohlin
theory? Which appear to be inconsistent?
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Questions and problem
 “The factor-price equalization theorem
indicates that with free trade the real wage
earned by labor becomes equal to the real
rental rate earned by landowners.” Is this
correct or not? Why?
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