HeckscherOhlin

1
Heckscher-Ohlin
To demonstrate the Heckscher-Ohlin (HO) result we
will use some of the earlier results, in
particular Factor Price Equalization
(FPE) and the Rybczynski (Ryb) theorem. It is the
of the four basic results that requires
only
identical homothetic preferences
First, note that if 2 countries start to trade
this equalizes the prices of the 2 final goods in
the 2 countries.
According to FPE under identical technologies and
CRS this equalizes the rewards for the 2 inputs,
the wage w for labour and the rental r for
capital, in the 2 countries.
That, in turn, implies that the capital-intensity
with which the 2 goods X and Y are produced are
identical in the 2 countries
According to Ryb. the country with (rel.) more
capital produces (rel.) more of the (rel.)
capital-intensive good say country A has more
capital, less labour and good X is (rel.) more
capital-intensive
2
Heckscher-Ohlin
Here is the green ppf of country B, it produces
at point Bp
Y (lab int)
Country A has more capital and less labour, so we
can trace first the Capital and then the Labor
Ryb-line to arrive at country As production
point Ap
Or we could take the other route and first trace
the Labour and then the Capital Ryb-line
The end result is obviously the same.
0
X (cap int)
3
Heckscher-Ohlin
Through country As production point Ap we can
also draw a ppf.
At the int. eq. trade prices for goods X and Y
the income line is tangent for country A at Ap
and for country B at Bp
Y (lab int)
This is where the assumption of identical
homothetic preferences comes in
B
Both countries consume somewhere along their own
income line, however the ratio with which goods X
and Y are consumed is the same
0
X (cap int)
4
Heckscher-Ohlin
If we know country Bs consumption point Bc along
its income line, extending a line from the origin
through Bc determines country As consumption
point Ac along its income line.
Y (lab int)
Naturally, to be an international equilibrium the
trade triangles have to match (reciprocally)
This can only occur if the consumption ratio is
in between Ap and Bp (as drawn)
Bp
0
X (cap int)
5
Heckscher-Ohlin
Since the consumption ratio is in between Ap and
Bp country B, which has relatively more labour
than country A, exports good Y, which uses labour
relatively intensively.
Y (lab int)
The reverse holds for country A (it has rel. more
capital and exports good X which uses capital
rel. intensively).
Bp
According to the HO result a country exports the
good which makes intensive use of its abundant
factor of production
0
X
X (cap int)