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100-458: (Redirected from H-O ) Heckscher–Ohlin can refer to: Heckscher–Ohlin model , a general equilibrium mathematical model of international trade Heckscher–Ohlin theorem , one of the four critical theorems of the Heckscher–Ohlin model Topics referred to by the same term [REDACTED] This disambiguation page lists articles associated with

200-585: A broader perspective, there has been work about the benefits of international trade. Zimring & Etkes (2014) finds that the Blockade of the Gaza Strip , which substantially restricted the availability of imports to Gaza, saw labor productivity fall by 20% in three years. Markusen et al. (1994) reports the effects of moving away from autarky to free trade during the Meiji Restoration , with

300-492: A comparative advantage in cloth, we consider five possibilities for the relative quantity of cloth supplied at a given price. As long as the relative demand is finite, the relative price is always bounded by the inequality In autarky, Home faces a production constraint of the form from which it follows that Home's cloth consumption at the production possibilities frontier is With free trade, Home produces cloth exclusively, an amount of which it exports in exchange for wine at

400-472: A convincing model needed to incorporate the idea of a 'continuum of goods' developed by Dornbusch et al. for both goods and countries. They were able to do so by allowing for an arbitrary (integer) number i of countries, and dealing exclusively with unit labor requirements for each good (one for each point on the unit interval) in each country (of which there are i). Two of the first tests of comparative advantage were by MacDougall (1951, 1952). A prediction of

500-407: A country where capital and land are abundant but labor is scarce has a comparative advantage in goods that require lots of capital and land, but little labor — such as grains. If capital and land are abundant, their prices are low. As they are the main factors in the production of grain, the price of grain is also low—and thus attractive for both local consumption and export. Labor-intensive goods, on

600-497: A famous comment, McKenzie pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England." However, McKenzie and later researchers could not produce a general theory which includes traded input goods because of the mathematical difficulty. As John Chipman points it, McKenzie found that "introduction of trade in intermediate product necessitates

700-423: A famous example, Ricardo considers a world economy consisting of two countries, Portugal and England , each producing two goods of identical quality. In Portugal, the a priori more efficient country, it is possible to produce wine and cloth with less labor than it would take to produce the same quantities in England. However, the relative costs or ranking of cost of producing those two goods differ between

800-417: A fundamental alteration in classical analysis." Durable capital goods such as machines and installations are inputs to the productions in the same title as part and ingredients. In view of the new theory, no physical criterion exists. Deardorff examines 10 versions of definitions in two groups but could not give a general formula for the case with intermediate goods. The competitive patterns are determined by

900-451: A local supply. If the two countries have separate currencies , this does not affect the model in any way— purchasing power parity applies. Since there are no transaction costs or currency issues the law of one price applies to both commodities, and consumers in either country pay exactly the same price for either good. In Ohlin's day this assumption was a fairly neutral simplification, but economic changes and econometric research since

1000-425: A lot less like the world modelled by Heckscher and Ohlin. It has been argued that capital mobility undermines the case for free trade itself, see: Capital mobility and comparative advantage Free trade critique . Capital is mobile when: Like capital, labor movements are not permitted in the Heckscher–Ohlin world, since this would drive an equalization of relative abundances of the two production factors, just as in

1100-424: A simple form where F C {\displaystyle \mathbf {F_{C}} } is the net trade of factor service vector for country c {\displaystyle c} , V C {\displaystyle \mathbf {V_{C}} } the factor endowment vector for country c {\displaystyle c} , and s C {\displaystyle s_{C}}

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1200-432: A single worldwide investment pool. Differences in labour abundance would not produce a difference in relative factor abundance (in relation to mobile capital) because the labour/capital ratio would be identical everywhere. (A large country would receive twice as much investment as a small one, for instance, maximizing capitalist's return on investment ). As capital controls are reduced, the modern world has begun to look

1300-439: A theory of international value in the tradition of Ricardo's cost-of-production theory of value . This was based on a wide range of assumptions: Many countries; Many commodities; Several production techniques for a product in a country; Input trade ( intermediate goods are freely traded); Durable capital goods with constant efficiency during a predetermined lifetime; No transportation cost (extendable to positive cost cases). In

1400-448: A two-country Ricardian comparative advantage model is that countries will export goods where output per worker (i.e. productivity) is higher. That is, we expect a positive relationship between output per worker and the number of exports. MacDougall tested this relationship with data from the US and UK, and did indeed find a positive relationship. The statistical test of this positive relationship

1500-478: A unit each of cloth and wine, with 0 to 0.2 units of cloth and 0 to 0.125 units of wine remaining in each respective country to be consumed or exported. Consequently, both England and Portugal can consume more wine and cloth under free trade than in autarky . The Ricardian model is a general equilibrium mathematical model of international trade . Although the idea of the Ricardian model was first presented in

1600-551: A variety of reasons; under Ulysses S. Grant , the US postponed opening up to free trade until its industries were up to strength, following the example set earlier by Britain. ) Nonetheless there is a large amount of empirical work testing the predictions of comparative advantage. The empirical works usually involve testing predictions of a particular model. For example, the Ricardian model predicts that technological differences in countries result in differences in labor productivity. The differences in labor productivity in turn determine

1700-560: A world of multiple commodities. Deardorff argues that the insights of comparative advantage remain valid if the theory is restated in terms of averages across all commodities. His models provide multiple insights on the correlations between vectors of trade and vectors with relative-autarky-price measures of comparative advantage. "Deardorff's general law of comparative advantage" is a model incorporating multiple goods which takes into account tariffs, transportation costs, and other obstacles to trade. Recently, Y. Shiozawa succeeded in constructing

1800-609: Is a L C / a L W {\displaystyle a_{LC}/a_{LW}} in Home and a L C ′ / a L W ′ {\displaystyle a'_{LC}/a'_{LW}} in Foreign. With free trade, the price of cloth or wine in either country is the world price P C {\displaystyle P_{C}} or P W {\displaystyle P_{W}} . Instead of considering

1900-425: Is relatively more productive than Foreign in making in cloth vs. wine: Equivalently, we may assume that Home has a comparative advantage in cloth in the sense that it has a lower opportunity cost for cloth in terms of wine than Foreign: In the absence of trade, the relative price of cloth and wine in each country is determined solely by the relative labor cost of the goods. Hence the relative autarky price of cloth

2000-443: Is a typical modern interpretation of the classical Ricardian model. In the interest of simplicity, it uses notation and definitions, such as opportunity cost, unavailable to Ricardo. The world economy consists of two countries, Home and Foreign, which produce wine and cloth. Labor, the only factor of production, is mobile domestically but not internationally; there may be migration between sectors but not between countries. We denote

2100-426: Is an "unrealistic" simplification designed to highlight the effect of variable factors. This meant that the original H–O model produced an alternative explanation for free trade to Ricardo's, rather than a complementary one; in reality, both effects may occur due to differences in technology and factor abundances. In addition to natural advantages in the production of one sort of output over another (wine vs. rice, say)

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2200-437: Is another way to prove the theory of comparative advantage, which requires less assumption than the above-detailed proof, and in particular does not require for the hourly wages to be equal in both industries, nor requires any equilibrium between offer and demand on the market. Such a proof can be extended to situations with many goods and many countries, non constant returns and more than one factor of production. Terms of trade

2300-443: Is assumed to exhibit constant returns to scale (CRS). CRS technologies implies that when inputs of both capital and labor is multiplied by a factor of k , the output also multiplies by a factor of k . For example, if both capital and labor inputs are doubled, output of the commodities is doubled. In other terms the production function of both commodities is " homogeneous of degree 1". The assumption of constant returns to scale CRS

2400-404: Is hard to assess the sole impact of open trade on a particular economy. Daniel Bernhofen and John Brown have attempted to address this issue, by using a natural experiment of a sudden transition to open trade in a market economy. They focus on the case of Japan. The Japanese economy indeed developed over several centuries under autarky and a quasi-isolation from international trade but was, by

2500-550: Is more efficient at producing wine than cloth. So, if each country specializes in the good for which it has a comparative advantage, then the global production of both goods increases, for England can spend 220 labor hours to produce 2.2 units of cloth while Portugal can spend 170 hours to produce 2.125 units of wine. Moreover, if both countries specialize in the above manner and England trades a unit of its cloth for ⁠ 5 / 6 ⁠ to ⁠ 9 / 8 ⁠ units of Portugal's wine, then both countries can consume at least

2600-417: Is possible to ask how this system of equations holds. The results obtained by Bowen, Leamer and Sveiskaus (1987) were disastrous. They examined the cases of 12 factors and 27 countries for the year 1967. They found that the two sides of the equations had the same sign only for 61% of 324 cases. For the year 1983, the result was more disastrous. Both sides had the same sign only for 148 cases out of 297 cases (or

2700-428: Is sometimes called the "2×2×2 model". The model has "variable factor proportions" between countries—highly developed countries have a comparatively high capital-to-labor ratio compared to developing countries . This makes the developed country capital-abundant relative to the developing country, and the developing nation labor-abundant in relation to the developed country. With this single difference, Ohlin

2800-431: Is the advantage over others in producing a particular good . A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Comparative advantage describes the economic reality of the gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. David Ricardo developed

2900-423: Is the major insight of the seminal paper by Dornbusch, Fisher, and Samuelson. In fact, inserting an increasing number of goods into the chain of comparative advantage makes the gaps between the ratios of the labor requirements negligible, in which case the three types of equilibria around any good in the original model collapse to the same outcome. It notably allows for transportation costs to be incorporated, although

3000-574: Is the rate at which one good could be traded for another. If both countries specialize in the good for which they have a comparative advantage then trade, the terms of trade for a good (that benefit both entities) will fall between each entities opportunity costs. In the example above one unit of cloth would trade for between 5 6 {\displaystyle {\frac {5}{6}}} units of wine and 9 8 {\displaystyle {\frac {9}{8}}} units of wine. In 1930 Austrian-American economist Gottfried Haberler detached

3100-582: Is useful because it exhibits a diminishing returns in a factor. Under constant returns to scale, doubling both capital and labor leads to a doubling of the output. Since outputs are increasing in both factors of production, doubling capital while holding labor constant leads to less than doubling of an output. Diminishing returns to capital and diminishing returns to labor are crucial to the Stolper–Samuelson theorem . The CRS production functions must differ to make trade worthwhile in this model. For instance if

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3200-616: The Essay on Profits (a single-commodity version) and then in the Principles (a multi-commodity version) by David Ricardo , the first mathematical Ricardian model was published by William Whewell in 1833. The earliest test of the Ricardian model was performed by G.D.A. MacDougall, which was published in Economic Journal of 1951 and 1952. In the Ricardian model, trade patterns depend on productivity differences. The following

3300-447: The factors of production ( land , labor , and capital ) determine a country's comparative advantage. Countries have comparative advantages in those goods for which the required factors of production are relatively abundant locally. This is because the profitability of goods is determined by input costs. Goods that require locally abundant inputs are cheaper to produce than those goods that require locally scarce inputs. For example,

3400-454: The neo-classical economics . The original, 2×2×2 model was derived with restrictive assumptions, partly for the sake of mathematical simplicity. Some of these have been relaxed for the sake of development. These assumptions and developments are listed here. This assumption means that producing the same output of either commodity could be done with the same level of capital and labour in either country. Actually, it would be inefficient to use

3500-651: The neoclassical specific factors Ricardo-Viner (which allows for the model to include more factors than just labour) and factor proportions Heckscher–Ohlin models . Subsequent developments in the new trade theory , motivated in part by the empirical shortcomings of the H–O model and its inability to explain intra-industry trade , have provided an explanation for aspects of trade that are not accounted for by comparative advantage. Nonetheless, economists like Alan Deardorff , Avinash Dixit , Gottfried Haberler , and Victor D. Norman have responded with weaker generalizations of

3600-432: The wage rates seem to consistently converge between trading partners at different levels of development. The Stolper–Samuelson theorem concerns nominal rents and wages. The Magnification effect on prices considers the effect of output-goods price-changes on the real return to capital and labor. This is done by dividing the nominal rates with a price index , but took thirty years to develop completely because of

3700-428: The 1950s have shown that the local prices of goods tend to correlate with incomes when both are converted at money prices (though this is less true with traded commodities). See: Penn effect . Neither labor nor capital has the power to affect prices or factor rates by constraining supply; a state of perfect competition exists. The results of this work has been the formulation of certain named conclusions arising from

3800-635: The Heckscher-Ohlin (H-O) model, developed by Swedish economists Eli Heckscher and Bertil Ohlin from the Stockholm School of Economics. The H-O model advances international trade theory by introducing the concept of factor endowments within a country as well as the underlying causes for differences in comparative costs between countries, while assuming countries will have identical production technologies. The H-O framework finds that countries have differing comparative costs even though they have

3900-405: The Heckscher–Ohlin model is that the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate preferences are the same. The relative abundance in capital leads the capital-abundant country to produce the capital-intensive good cheaper than the labor-abundant country, and vice versa. Initially, when the countries are not trading: The price of

4000-406: The H–O model assumes capital is privately held. Bertil Ohlin first explained the theory in a book published in 1933. Ohlin wrote the book alone, but he credited Heckscher as co-developer of the model because of his earlier work on the problem, and because many of the ideas in the final model came from Ohlin's doctoral thesis, supervised by Heckscher. Interregional and International Trade itself

4100-532: The Importation of Foreign Corn featured the earliest recorded formulation of the concept of comparative advantage. Torrens would later publish his work External Corn Trade in 1815 acknowledging this pamphlet author's priority. In 1817, David Ricardo published what has since become known as the theory of comparative advantage in his book On the Principles of Political Economy and Taxation . In

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4200-417: The arable industry and the fishing industry it is assumed that farmers can shift to work as fishermen with no cost and vice versa. It is further assumed that capital can shift easily into either technology, so that the industrial mix can change without adjustment costs between the two types of production. For instance, if the two industries are farming and fishing it is assumed that farms can be sold to pay for

4300-568: The assumption that technology is not the same everywhere. This change would mean abandoning the pure H–O model. In 1954 an econometric test by Wassily W. Leontief of the H–O model found that the United States, despite having a relative abundance of capital, tended to export labor-intensive goods and import capital-intensive goods. This problem became known as the Leontief paradox . Alternative trade models and various explanations for

4400-414: The assumptions inherent in the model. Exports of a capital-abundant country come from capital-intensive industries, and labour-abundant countries import such goods, exporting labour-intensive goods in return. Competitive pressures within the H–O model produce this prediction fairly straightforwardly. Conveniently, this is an easily testable hypothesis. When the amount of one factor of production increases,

4500-536: The borders in the two economies, the main variables would remain unchanged. Avinash Dixit and Victor D. Norman (1980, chp.4) proposed the integrated world equilibrium (IWE) diagram to illustrate the equilibrium with mobile factors: world prices will remain unchanged when factor endowments are redistributed within the factor price equalization (FPE) set. Much literature confirmed this result fully. Elhanan Helpman and Paul Krugman (1985, p.23-24) further used equal-trade-volume lines to illustrate trade equilibrium and

4600-464: The capital and labour were mobile, both wine and cloth should be made in Portugal, with the capital and labour of England removed there. If they were not mobile, as Ricardo believed them to be generally, then England's comparative advantage (due to lower opportunity cost) in producing cloth means that it has an incentive to produce more of that good which is relatively cheaper for them to produce than

4700-685: The capital-abundant country will export the capital-intensive good, the labor-abundant country will export the labor-intensive good. The original Heckscher–Ohlin model and extended model such as the Vanek model performs poorly, as it is shown in the section " Econometric testing of H–O model theorems". Daniel Trefler and Susan Chun Zhu summarizes their paper that "It is hard to believe that factor endowments theory [editor's note: in other words, Heckscher–Ohlin–Vanek Model] could offer an adequate explanation of international trade patterns". Comparative advantage Comparative advantage in an economic model

4800-403: The capital-intensive good in the capital-abundant country will be bid down relative to the price of the good in the other country, the price of the labor-intensive good in the labor-abundant country will be bid down relative to the price of the good in the other country. Once trade is allowed, profit-seeking firms move their products to the markets that have (temporary) higher prices. As a result:

4900-455: The case of capital immobility. This condition is more defensible as a description of the modern world than the assumption that capital is confined to a single country. The 2x2x2 model originally placed no barriers to trade, had no tariffs , and no exchange controls (capital was immobile, but repatriation of foreign sales was costless). It was also free of transportation costs between the countries, or any other savings that would favor procuring

5000-486: The classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country's workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market (albeit with the assumption that the capital and labour do not move internationally ), then each country will increase its overall consumption by exporting

5100-434: The comparative advantages across different countries. Testing the Ricardian model for instance involves looking at the relationship between relative labor productivity and international trade patterns. A country that is relatively efficient in producing shoes tends to export shoes. Assessing the validity of comparative advantage on a global scale with the examples of contemporary economies is analytically challenging because of

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5200-545: The concept of absolute advantage as the basis for international trade in 1776, in The Wealth of Nations : If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished [...] but only left to find out

5300-422: The construction of fishing boats with no transaction costs. The theory by Avsar has offered much criticism to this. The basic Heckscher–Ohlin model depends upon the relative availability of capital and labor differing internationally, but if capital can be freely invested anywhere, competition (for investment) makes relative abundances identical throughout the world. Essentially, free trade in capital provides

5400-497: The countries. In this illustration, England could commit 100 hours of labor to produce one unit of cloth, or produce ⁠ 5 / 6 ⁠ units of wine. Meanwhile, in comparison, Portugal could commit 100 hours of labor to produce ⁠ 10 / 9 ⁠ units of cloth, or produce ⁠ 10 / 8 ⁠ units of wine. Portugal possesses an absolute advantage in producing both cloth and wine due to more produced per hour (since ⁠ 10 / 9 ⁠ > 1). If

5500-415: The country c {\displaystyle c} 's share of the world consumption and V {\displaystyle \mathbf {V} } the world total endowment vector of factors. For many countries and many factors, it is possible to estimate the left hand sides and right hand sides independently. To put it another way, the left hand side tells the direction of factor service trade. Thus it

5600-490: The country implementing these so-called strategic trade policies. There are some economists who dispute the claims of the benefit of comparative advantage. James K. Galbraith has stated that "free trade has attained the status of a god" and that "   ... none of the world's most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached their current status by adopting neoliberal trading rules." He argues that comparative advantage relies on

5700-418: The difference in the costs of a particular factor when a cheaper factor is more abundant. The theory predicts that nations will export the goods that make the most of the factors that are abundant in their soil and will import those that are made with scarce factors. Thus, this theory aims to explain the scheme of international trade that we observe in the world economy. Ohlin and Heckscher's theory advocates that

5800-419: The doctrine of comparative advantage from Ricardo's labor theory of value and provided a modern opportunity cost formulation. Haberler's reformulation of comparative advantage revolutionized the theory of international trade and laid the conceptual groundwork of modern trade theories. Haberler's innovation was to reformulate the theory of comparative advantage such that the value of good X is measured in terms of

5900-435: The economy occurred in the first 20 years of trade. The general law of comparative advantage theorizes that an economy should, on average, export goods with low self-sufficiency prices and import goods with high self-sufficiency prices. Bernhofen and Brown found that by 1869, the price of Japan's main export, silk and derivatives, saw a 100% increase in real terms, while the prices of numerous imported goods declined of 30-75%. In

6000-405: The expense of its arable farms. Conversely, the workers available in the relatively labor-abundant country can be employed relatively more efficiently in arable farming. Within countries, capital and labor can be reinvested and reemployed to produce different outputs. Similar to Ricardo's comparative advantage argument, this is assumed to happen without cost. If the two production technologies are

6100-525: The forgone units of production of good Y rather than the labor units necessary to produce good X, as in the Ricardian formulation. Haberler implemented this opportunity-cost formulation of comparative advantage by introducing the concept of a production possibility curve into international trade theory. Since 1817, economists have attempted to generalize the Ricardian model and derive the principle of comparative advantage in broader settings, most notably in

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6200-412: The framework remains restricted to two countries. But in the case with many countries (more than 3 countries) and many commodities (more than 3 commodities), the notion of comparative advantage requires a substantially more complex formulation. Skeptics of comparative advantage have underlined that its theoretical implications hardly hold when applied to individual commodities or pairs of commodities in

6300-505: The functions are Cobb–Douglas technologies the parameters applied to the inputs must vary. An example would be: where A is the output in arable production, F is the output in fish production, and K , L are capital and labor in both cases. In this example, the marginal return to an extra unit of capital is higher in the fishing industry , assuming units of fish ( F ) and arable output ( A ) have equal value. The more capital-abundant country may gain by developing its fishing fleet at

6400-425: The good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries. Widely regarded as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory implies that comparative advantage rather than absolute advantage is responsible for much of international trade. Adam Smith first alluded to

6500-459: The increased ability of transferring knowledge/ production technologies between countries, mainly focusing on factorial differences such as labor force and resource allocation as to why countries trade with each other. The Ricardian model of comparative advantage has trade ultimately motivated by differences in labour productivity using different "technologies". Heckscher and Ohlin did not require production technology to vary between countries, so (in

6600-567: The infrastructure, education, culture, and "know-how" of countries differ so dramatically that the idea of identical technologies is a theoretical notion. Ohlin said that the H–O model was a long-run model, and that the conditions of industrial production are "everywhere the same" in the long run. In a simple model, both countries produce two commodities. Each commodity in turn is made using two factors of production. The production of each commodity requires input from both factors of production—capital (K) and labor (L). The technologies of each commodity

6700-459: The inter-country variation of labour productivity that Ricardo had imposed exogenously. With international variations in the capital endowment like infrastructure and goods requiring different factor "proportions", Ricardo's comparative advantage emerges as a profit-maximizing solution of capitalist's choices from within the model's equations. The decision that capital owners are faced with is between investments in differing production technologies;

6800-487: The interests of simplicity) the "H–O model has identical production technology everywhere". Ricardo considered a single factor of production (labour) and would not have been able to produce comparative advantage without technological differences between countries (all nations would become autarkic at various stages of growth, with no reason to trade with each other). The H–O model removed technology variations but introduced variable capital endowments, recreating endogenously

6900-455: The intersection of world relative demand R D {\displaystyle \textstyle RD} and world relative supply R S {\displaystyle \textstyle RS} curves. We assume that the relative demand curve reflects substitution effects and is decreasing with respect to relative price. The behavior of the relative supply curve, however, warrants closer study. Recalling our original assumption that Home has

7000-609: The labor force in Home by L {\displaystyle \textstyle L} , the amount of labor required to produce one unit of wine in Home by a L W {\displaystyle \textstyle a_{LW}} , and the amount of labor required to produce one unit of cloth in Home by a L C {\displaystyle \textstyle a_{LC}} . The total amount of wine and cloth produced in Home are Q W {\displaystyle Q_{W}} and Q C {\displaystyle Q_{C}} respectively. We denote

7100-407: The mid-19th century, a sophisticated market economy with a population of 30 million. Under Western military pressure, Japan opened its economy to foreign trade through a series of unequal treaties . In 1859, the treaties limited tariffs to 5% and opened trade to Westerners. Considering that the transition from autarky, or self-sufficiency, to open trade was brutal, few changes to the fundamentals of

7200-546: The model various real-world considerations (such as tariffs ) in the hopes of increasing the model's predictive power, or as a mathematical way of discussing macroeconomic policy options. Notable contributions came from Paul Samuelson , Ronald Jones , and Jaroslav Vanek , so that variations of the model are sometimes called the Heckscher–Ohlin–Samuelson model (HOS) or the Heckscher–Ohlin–Vanek model in

7300-411: The multiple factors driving globalization: indeed, investment, migration, and technological change play a role in addition to trade. Even if we could isolate the workings of open trade from other processes, establishing its causal impact also remains complicated: it would require a comparison with a counterfactual world without open trade. Considering the durability of different aspects of globalization, it

7400-560: The next decade, the ratio of imports to gross domestic product reached 4%. Another important way of demonstrating the validity of comparative advantage has consisted in 'structural estimation' approaches. These approaches have built on the Ricardian formulation of two goods for two countries and subsequent models with many goods or many countries. The aim has been to reach a formulation accounting for both multiple goods and multiple countries, in order to reflect real-world conditions more accurately. Jonathan Eaton and Samuel Kortum underlined that

7500-403: The other hand, China excels in the export of goods made with cheap labor such as textiles or shoes. This demonstrates why the United States has been a large importer of these Chinese products since it does not abound in cheap labor. While still building on traditional models such as the Ricardian framework, the mid 1900s bring forth innovation in international trade theory with the introduction of

7600-410: The other hand, are very expensive to produce since labor is scarce and its price is high. Therefore, the country is better off importing those goods. The comparative advantage is due to the fact that nations have various factors of production, the endowment of factors is the number of resources such as land, labor, and capital that a country has. Countries are endowed with multiple factors which explains

7700-407: The other—assuming they have an advantageous opportunity to trade in the marketplace for the other more difficult to produce good. In the absence of trade, England requires 220 hours of work to both produce and consume one unit each of cloth and wine while Portugal requires 170 hours of work to produce and consume the same quantities. England is more efficient at producing cloth than wine, and Portugal

7800-598: The paradox have emerged as a result of the paradox. One such trade model, the Linder hypothesis , suggests that goods are traded based on similar demand rather than differences in supply side factors (i.e., H–O's factor endowments). Various attempts in the 1960s and 1970s have been made to "solve" the Leontief paradox and save the Heckscher–Ohlin model from failing. From the 1980s a new series of statistical tests had been tried. The new tests depended on Vanek's formula. It takes

7900-416: The pattern of international trade is determined by differences in factor endowments rather than by differences in productivity. The endowments are relative and not absolute. One nation may have more land and workers than another but be relatively abundant in one of two factors. For example; The United States is a leading exporter of agricultural products, which reflects its great abundance of arable land, and on

8000-485: The prevailing rate. Thus Home's overall consumption is now subject to the constraint while its cloth consumption at the consumption possibilities frontier is given by A symmetric argument holds for Foreign. Therefore, by trading and specializing in a good for which it has a comparative advantage, each country can expand its consumption possibilities. Consumers can choose from bundles of wine and cloth that they could not have produced themselves in closed economies. There

8100-424: The principle of comparative advantage, in which countries will only tend to export goods for which they have a comparative advantage. In both the Ricardian and H–O models, the comparative advantage theory is formulated for a 2 countries/2 commodities case. It can be extended to a 2 countries/many commodities case, or a many countries/2 commodities case. Adding commodities in order to have a smooth continuum of goods

8200-416: The production of the good that uses that particular production factor intensively increases relative to the increase in the factor of production, as the H–O model assumes perfect competition where price is equal to the costs of factors of production. This theorem is useful in explaining the effects of immigration, emigration, and foreign capital investment. However, Rybczynski suggests that a fixed quantity of

8300-448: The quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home. The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange. In 1814 the anonymously published pamphlet Considerations on

8400-512: The rate of correct predictions was 49.8%). The results of Bowen, Leamer, and Sveiskaus (1987) mean that the Heckscher–Ohlin–Vanek (HOV) theory has no predictive power concerning the direction of trade. Paul Samuelson (1949) initialed the study of trade equilibrium in Heckscher-Ohlin model . He verbally stated an idea that, assuming the borders between the two countries were redrawn and thereby production and factors "redistributed" across

8500-488: The result that national income increased by up to 65% in 15 years. Several arguments have been advanced against using comparative advantage as a justification for advocating free trade, and they have gained an audience among economists. James Brander and Barbara Spencer demonstrated how, in a strategic setting where a few firms compete for the world market, export subsidies and import restrictions can keep foreign firms from competing with national firms, increasing welfare in

8600-428: The return to labor). Also, if the price of labor-intensive goods increases, it increases the relative wage rate and decreases the relative rental rate. Free and competitive trade makes factor prices converge along with traded goods prices. The FPE theorem is the most significant conclusion of the H–O model, but also has found the least agreement with the economic evidence. Neither the rental return to capital, nor

8700-404: The same balance in either country (because of the relative availability of either input factor) but, in principle this would be possible. Another way of saying this is that the per-capita productivity is the same in both countries in the same technology with identical amounts of capital. Countries have natural advantages in the production of various commodities in relation to one another, so this

8800-534: The same production technologies due to differences in factors of production, such as the geographical abundance of natural resources or population size. Furthermore, what the H-O model concludes is that traded commodities are essentially bundles of factors (land, labor, and capital) and therefore the international trade of commodities is indirect factor arbitrage (Leamer 1995).The H-O model more accurately describes international trade patterns in modern times (post WWII) due to

8900-569: The same variables for Foreign by appending a prime . For instance, a L W ′ {\displaystyle \textstyle a'_{LW}} is the amount of labor needed to produce a unit of wine in Foreign. We do not know if Home can produce cloth using fewer hours of work than Foreign. That is, we do not know if a L C < a L C ′ {\displaystyle a_{LC}<a'_{LC}} . Similarly, we do not know if Home can produce wine using fewer hours of work. However, we assume Home

9000-511: The theoretical complexity involved. Heckscher and Ohlin considered the Factor-Price Equalization theorem an econometric success because the large volume of international trade in the late 19th and early 20th centuries coincided with the convergence of commodity and factor prices worldwide. Modern econometric estimates have shown the model to perform poorly, however, and adjustments have been suggested, most importantly

9100-613: The theory to allow for such a large number of goods as to form a smooth continuum. Based in part on these generalizations of the model, Davis (1995) provides a more recent view of the Ricardian approach to explain trade between countries with similar resources. More recently, Golub and Hsieh (2000) presents modern statistical analysis of the relationship between relative productivity and trade patterns, which finds reasonably strong correlations, and Nunn (2007) finds that countries that have greater enforcement of contracts specialize in goods that require relationship-specific investments. Taking

9200-500: The title Heckscher–Ohlin . If an internal link led you here, you may wish to change the link to point directly to the intended article. Retrieved from " https://en.wikipedia.org/w/index.php?title=Heckscher–Ohlin&oldid=932869342 " Category : Disambiguation pages Hidden categories: Short description is different from Wikidata All article disambiguation pages All disambiguation pages Heckscher%E2%80%93Ohlin model Relative endowments of

9300-559: The trade basics in the IWE diagram. Guo (2023) introduced a Dixit-Norman constant and used the equal trade volume line to obtain the general trade equilibrium by The factor-price equalization theorem about the relationship between factor prices and factor supplies is empty. This is an important supplement to show the supply-demand relationship between factor prices and factor supplies. The equilibrium links Heckscher-Ohlin theorem with factor price equalization theorem . The critical assumption of

9400-413: The traders trials to find cheapest products in a world. The search of cheapest product is achieved by world optimal procurement. Thus the new theory explains how the global supply chains are formed. Comparative advantage is a theory about the benefits that specialization and trade would bring, rather than a strict prediction about actual behavior. (In practice, governments restrict international trade for

9500-442: The two factors of production are required. This could be expanded to consider factor substitution, in which case the increase in production is more than proportional. Relative changes in output goods prices drive the relative prices of the factors used to produce them. If the world price of capital-intensive goods increases, it increases the relative rental rate and decreases the relative wage rate (the return on capital as against

9600-411: The way in which it can be employed with the greatest advantage. Writing several decades after Smith in 1808, Robert Torrens articulated a preliminary definition of comparative advantage as the loss from the closing of trade: [I]f I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broadcloth , in exchange for a hundred pounds of lace, I take

9700-444: The world demand (or supply) for cloth and wine, we are interested in the world relative demand (or relative supply ) for cloth and wine, which we define as the ratio of the world demand (or supply) for cloth to the world demand (or supply) for wine. In general equilibrium, the world relative price P C / P W {\displaystyle \textstyle P_{C}/P_{W}} will be determined uniquely by

9800-439: Was able to discuss the new mechanism of comparative advantage , using just two goods and two technologies to produce them. One technology would be a capital-intensive industry, the other a labor-intensive business—see "assumptions" below. The model has been extended since the 1930s by many economists. These developments did not change the fundamental role of variable factor proportions in driving international trade, but added to

9900-457: Was replicated with new data by Stern (1962) and Balassa (1963). Dosi et al. (1988) conducted a book-length empirical examination that suggests that international trade in manufactured goods is largely driven by differences in national technological competencies. One critique of the textbook model of comparative advantage is that there are only two goods. The results of the model are robust to this assumption. Dornbusch et al. (1977) generalized

10000-406: Was verbose, rather than being pared down to the mathematical, and appealed because of its new insights. The original H–O model assumed that the only difference between countries was the relative abundances of labour and capital. The original Heckscher–Ohlin model contained two countries, and had two commodities that could be produced. Since there are two (homogeneous) factors of production this model

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