Other Assumptions:

1
Other Assumptions

• two countries, two factors, two products
• perfect competition in all markets
• Free trade
• Factors of production are available in fixed
  amounts in each country
• Full mobility of factors of production between
  industries within each country
• Immobility of factors of production between
  countries
• The two countries are alike with respect to
  tastes
• Technology is available to both countries and
• Linear homogeneous production functions of degree
  one (constant returns to scale).

2
The Heckscher-Ohlin Theorem

• Critical Assumptions
• Countries are characterized by different factor
  endowments--a country is capital abundant if it
  has a higher ratio of capital to other factors
  than does its trading partner
• There are different factor intensities between
  products--a product is capital-intensive if, at
  identical wages and rents, its production
  requires more capital per worker than does the
  other product.

3
The H-O Theorem

• Given identical production functions but
  different factor endowments between countries, a
  country will tend to export the commodity which
  is relatively intensive in her relatively
  abundant factor
• In general, countries tend to have comparative
  advantage in the products that are relatively
  intensive in their relatively abundant factors

4
Example

• Consider the following data on the factor
  endowments of Brazil and Poland. Also, Suppose
  that steel is capital intensive relative to
  textile. If trade opens between Brazil and
  Poland, what would be the direction of trade?

Factor Endowments Brazil Poland
Labor Force 45,000,000 20,000,000
Capital 15,000 10,000
5
The Factor Price Equalization Theorem

• Assumptions
• there are two countries using two factors of
  production producing two products
• competition prevails in all markets
• each factor supply is fixed, and there is no
  migration between countries
• each factor is fully employed in each country
  with or without trade
• there are no transportation or information costs
• free trade
• production functions exhibit constant returns to
  scale, and are the same between countries for any
  industry
• production functions are not subject to factor
  intensity reversals and
• both countries produce both products with or
  without trade.

6
The Factor Price Equalization Theorem

• Free trade will equalize not only commodity
  prices but also factor prices, so that all
  workers earn the same wage rate and all units of
  capital will earn the same rental return in both
  countries regardless of the factor supplies or
  the demand patterns in the two countries

7
Hourly Pay in Manufacturing Before Correction for
Differences in Labor Productivity