Chapter 4 Resources and Trade. The Heckscher-Ohlin Model
Chapter 4 ▪ Resources and Trade:The Heckscher-Ohlin Model
Chapter Organization Introduction A Model of a Two-Factor Economy Effects of International Trade between Two-Factor Economies Empirical Evidence on the Heckscher-Ohlin Model Summary Appendix: Factor Prices, Goods Prices, and Input Choices Copyright C 2003 Pearson Education, Inc 4-2
Copyright © 2003 Pearson Education, Inc. Slide 4-2 ▪ Introduction ▪ A Model of a Two-Factor Economy ▪ Effects of International Trade Between Two-Factor Economies ▪ Empirical Evidence on the Heckscher-Ohlin Model ▪ Summary ▪ Appendix: Factor Prices, Goods Prices, and Input Choices Chapter Organization
Introduction In the real world, while trade is partly explained by differences in labor productivity, it also reflects differences in countries' resources The Heckscher-Ohlin theory Emphasizes resource differences as the only source of trade Shows that comparative advantage is influenced by Relative factor abundance(refers to countries) Relative factor intensity(refers to goods Is also referred to as the factor-proportions theory Copyright C 2003 Pearson Education, Inc Slide 4-3
Copyright © 2003 Pearson Education, Inc. Slide 4-3 Introduction ▪ In the real world, while trade is partly explained by differences in labor productivity, it also reflects differences in countries’ resources. ▪ The Heckscher-Ohlin theory: • Emphasizes resource differences as the only source of trade • Shows that comparative advantage is influenced by: – Relative factor abundance (refers to countries) – Relative factor intensity (refers to goods) • Is also referred to as the factor-proportions theory
A Model of a Two-Factor Economy Assumptions of the model An economy can produce two goods, cloth and food The production of these goods requires two inputs that are in limited supply; labor (l)and landt) Production of food is land-intensive and production of cloth is labor-intensive in both countries Perfect competition prevails in all markets Copyright C 2003 Pearson Education, Inc Slide 4-4
Copyright © 2003 Pearson Education, Inc. Slide 4-4 ▪ Assumptions of the Model • An economy can produce two goods, cloth and food. • The production of these goods requires two inputs that are in limited supply; labor (L) and land (T). • Production of food is land-intensive and production of cloth is labor-intensive in both countries. • Perfect competition prevails in all markets. A Model of a Two-Factor Economy
A Model of a Two-Factor Economy Figure 4-1: Input Possibilities in Food Production Unit land input aTF, in acres per calorie Input combinations that produce one calorie of food Unit land input alF, Copyright C 2003 Pearson Education, Inc in hours per calorie Slide 4-5
Copyright © 2003 Pearson Education, Inc. Slide 4-5 // Input combinations that produce one calorie of food Unit land input aTF , in acres per calorie Unit land input aLF , in hours per calorie A Model of a Two-Factor Economy Figure 4-1: Input Possibilities in Food Production