Trade and Resources: The Heckscher–
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Questions to Consider
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1. Why does the United States export agricultural products and airplanes?
2. What country has the most capital (i.e., factories) as compared with its GDP?
3. How does trade affect the earnings of labor and capital?
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Introduction (part 1)
• In this chapter, we outline the Heckscher–Ohlin (HO) model, a model that assumes that trade occurs because countries have different resources.
• Canada has a large amount of land and therefore exports agricultural and forestry products, as well as petroleum.
• The United States, Western Europe, and Japan have many highly skilled workers and much capital, and these countries export sophisticated services and manufactured goods.
• Asian countries have a large number of workers and moderate but growing amounts of capital, and they export less sophisticated manufactured goods.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Introduction (part 2)
• Our first goal is to describe the Heckscher– Ohlin (HO) model of trade.
– The specific-factors model that we studied in the previous chapter was a short-run model
because capital and land could not move between the two industries.
– In contrast, the HO model is a long-run model because all factors of production can move between the industries.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
Introduction (part 3)
• Our second goal is to examine the empirical evidence on the Heckscher–Ohlin model. To obtain better predictions, we extend the model:
• By allowing for more than two factors of production
• By also allowing countries to differ in their technologies, as in the Ricardian model
• Both of these extensions make the predictions from the Heckscher–Ohlin model match more closely the trade patterns in the world economy today.
• The third goal of the chapter is to investigate how the opening of trade between two countries affects the payments to labor and to capital in each of them.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 1)
• Assumptions of the Heckscher– Assumption 1: Both factors, labor and capital, can move freely between
the industries.
Assumption 2: Shoe production is labor-intensive; that is, it requires more labor per unit of capital to produce shoes than computers, so LS/KS > LC/KC .
Labor Intensity of Each Industry
Shoe production being more labor- intensive than computers implies:
LS/KS > LC/KC
These two curves slope down just like regular demand curves, but in this case, they are relative demand curves for labor.
FIGURE 4-1
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 2)
• Assumptions of the Heckscher–
• Assumption 3: Foreign is labor-abundant, by which we mean that the
labor–capital ratio in Foreign exceeds that in Home,
• 𝐿!∗/𝐾#∗ > 𝐿!/𝐾#
• Equivalently, Home is capital-abundant, so that 𝐾#/𝐿! > 𝐾#∗/𝐿!∗.
• Assumption 4: The final outputs, shoes and computers, can be traded freely (i.e., without any restrictions) between nations, but labor and capital do not move between countries.
• Assumption 5: The technologies used to produce the two goods are identical across the countries.
• Assumption 6: Consumer tastes are the same across countries, and preferences for computers and shoes do not vary with a country’s level of income.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
APPLICATION: Are Factor Intensities the Same Across Countries?
• While much of the footwear in the world is produced in developing nations, the United States retains a small number of shoe factories.
• In India, the sewing machine used to produce footwear is cheaper than the computer used in a call center. Footwear production in India is labor-intensive as compared with the call center, which is the opposite of what holds in the United States.
• This example illustrates a reversal of factor intensities between the two countries.
• In the United States, agriculture is capital-intensive. In many developing countries, it is labor-intensive.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 3)
• No-Trade Equilibrium
• Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (1 of 3) No-Trade Equilibria in Home and Foreign
The Home production possibilities frontier (PPF) is shown in panel (a), and the Foreign PPF is shown in panel (b).
Because Home is capital-abundant and computers are capital-intensive, the Home PPF is skewed toward computers.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 4)
• No-Trade Equilibrium
• Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (2 of 3) No-Trade Equilibria in Home and Foreign
Home preferences are summarized by the indifference curve, U.
The Home no-trade (or autarky) equilibrium is at point A.
The flat slope indicates a low relative price of computers, (PC/PS)A.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 5)
• No-Trade Equilibrium
• Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (3 of 3) No-Trade Equilibria in Home and Foreign
Foreign is labor-abundant and shoes are labor- intensive, so the Foreign PPF is skewed toward shoes. Foreign preferences are summarized by the indifference curve, U*.
The Foreign no-trade equilibrium is at point A*, with a higher relative price of computers, as indicated by the steeper slope of (P*C/P*S)A*.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 6)
• No-Trade Equilibrium
• Home Equilibrium with Free Trade
FIGURE 4-3 (1 of 2) International Free-Trade Equilibrium in Home
At the free-trade world relative price of computers, (PC/PS)W, Home produces at point B in panel (a) and consumes at point C, exporting computers and importing shoes. Point A is the no-trade equilibrium.
The “trade triangle” has a base equal to the Home exports of computers (the difference between the amount produced and the amount consumed with trade, QC2 − QC3).
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 7)
• No-Trade Equilibrium
• Home Equilibrium with Free Trade
FIGURE 4-3 (2 of 2) International Free-Trade Equilibrium in Home
The height of this triangle is the Home imports of shoes (the difference between the amount consumed of shoes and the amount produced with trade, QS3 − QS2).
In panel (b), we show Home exports of computers equal to zero at the no-trade relative price, (PC/PS)A, and equal to (QC2 − QC3) at the free- trade relative price, (PC/PS)W.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 8)
• No-Trade Equilibrium
• Foreign Equilibrium with Free Trade
FIGURE 4-4 (1 of 2) International Free-Trade Equilibrium in Foreign
At the free-trade world relative price of computers, (PC/PS)W, Foreign produces at point B* in panel (a) and consumes at point C*, importing computers and exporting shoes. Point A* is the no-trade equilibrium.
The “trade triangle” has a base equal to Foreign imports of computers (the difference between the consumption of computers and the amount produced with trade, Q*C3 − Q*C2).
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 9)
• No-Trade Equilibrium
• Foreign Equilibrium with Free Trade
FIGURE 4-4 (2 of 2) International Free-Trade Equilibrium in Foreign
The height of this triangle is Foreign exports of shoes (the difference between the production of shoes and the amount consumed with trade, Q*S2 – Q*S3).
In panel (b), we show Foreign imports of computers equal to zero at the no-trade relative price, (P*C/P*S)A*, and equal to (Q*C3 − Q*C2) at the free-trade relative price, (PC /PS)W.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 10)
• Free Trade Equilibrium
• Equilibrium Price with Free Trade
FIGURE 4-5 Determination of the Free-Trade World Equilibrium Price
The world relative price of computers in the free-trade equilibrium is determined at the intersection of the Home export supply and Foreign import demand, at point D.
At this relative price, the quantity of computers that Home wants to export, (QC2 − QC3), just equals the quantity of computers that Foreign wants to import, (Q*C3 − Q*C2).
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 11)
• Free Trade Equilibrium
• Pattern of Trade
– Home exports computers, the good that uses intensively the factor of production (capital) found in abundance at Home.
– Foreign exports shoes, the good that uses intensively the factor of production (labor) found in abundance there.
– This important result is called the Heckscher– Ohlin theorem.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 12)
• Heckscher–
– Assumption 1: Labor and capital flow freely between the
industries.
– Assumption 2: The production of shoes is labor- intensive as compared with computer production, which is capital-intensive.
– Assumption 3: The amounts of labor and capital found in the two countries differ, with labor abundant in Foreign and capital abundant in Home.
– Assumption 4: There is free international trade in goods.
– Assumption 5: The technologies for producing shoes
and computers are the same across countries.
– Assumption 6: Tastes are the same across countries.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
1) Heckscher– (part 13)
• Heckscher–
• Conclusions from Assumptions:
– When Home opens to trade, its relative price of computers rises from the no-trade equilibrium relative price (PC/PS)A to the free-trade equilibrium price
(PC /PS)W, giving Home firms an incentive to export computers.
– Similarly, when Foreign opens to trade, its relative price of computers falls from the no-trade equilibrium price (P*C/P*S)A* to the trade equilibrium price
(PC /PS)W , encouraging Foreign consumers to import computers from Home.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 1)
• The first test of the Heckscher–Ohlin theorem was performed by economist in 1953 using data for the United States from 1947.
• Leontief supposed correctly that in 1947 the United States was abundant in capital relative to the rest of the world.
o LeontiefassumedthatU.S.andforeigntechnologieswerethesamedueto the limited data on foreign technology, which is consistent with H–O theorem.
• Thus, from the Heckscher–Ohlin theorem, Leontief expected that the United States would export capital-intensive goods and import labor- intensive goods.
• What Leontief actually found, however, was just the opposite: the capital– labor ratio for U.S. imports was higher than the capital–labor ratio found for U.S. exports.
• This finding contradicted the Heckscher–Ohlin theorem and came to be called Leontief’s paradox.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 2)
TABLE 4-1 Leontief’s Test
Leontief used the numbers in this table to test the Heckscher–Ohlin theorem. Each column shows the amount of capital or labor needed to produce $1 million worth of exports from, or imports into, the United States in 1947. As shown in the last row, the capital–labor ratio for exports was less than the capital–labor ratio for imports, which is a paradoxical finding.
Capital ($ millions)
Labor (person-years)
Capital/labor ($/person)
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 3)
• Leontief’s Paradox
• Explanations
– U.S. and foreign technologies are not the same, in contrast to what the H–O theorem and Leontief assumed.
– By focusing only on labor and capital, Leontief ignored land abundance in the United States.
– Leontief should have distinguished between high-skilled and low- skilled labor (because it would not be surprising to find that U.S. exports are intensive in high-skilled labor).
– The data for 1947 may be unusual because World War II had ended just two years earlier, and so trade patterns may have been unusual.
– Because of import tariffs between countries, the United States was not engaged in completely free trade, as the Heckscher–Ohlin theorem assumes.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckascher– (part 4)
• Factor Endowments in 2017
• To determine whether a country is abundant in a certain factor, we compare the country’s share of that factor with its share of world GDP.
• If its share of a factor exceeds its share of world GDP, then we conclude that the country is abundant in that factor.
• If its share in a certain factor is less than its share of world GDP, then we conclude that the country is scarce in that factor.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 5)
• Factor Endowments in 2017
FIGURE 4-6 (1 of 2) Country Factor Endowments, 2017
• Shown here are country shares of six factors of production in the year 2017, for eight countries and the rest of the world. We see that 11.8% of the world’s physical capital was located in the United States, with 20.5% located in China and 4.4% located in Japan. In the final bar graph, we see the United States had 16.0% of world GDP, China had 16.2%, Japan had 4.5%, and so on.
• When a country’s factor share is larger than its share of GDP, then the country is abundant in that factor, and when a country’s factor share is less than its share of GDP, then the country is scarce in that factor.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 6)
• Factor Endowments in 2017
FIGURE 4-6 (2 of 2) Country Factor Endowments, 2017
• The United States is scarce in arable land (13.6% of the world’s total as compared with 16.0% of the world’s GDP). This is a surprising result, as we usually think of the United States as a major exporter of agricultural commodities, so according to the Heckscher–Ohlin theorem, we would expect it to be land- abundant.
• Another surprising result is that China was abundant in research and development (R&D) scientists: it had 19.7% of the world’s R&D scientists, as compared with 16.2% of the world’s GDP in 2017. This seems to contradict the H–O theorem, as China exports basic rather than research-intensive goods.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 7)
• Evolution of Factor Endowments in China and the United States
– Leontief found that the United States was exporting labor-intensive products even though it was capital-abundant at the time.
– One explanation for this outcome would be that labor is highly productive in the United States and less productive in the rest of the world.
– If that is the case, then the effective labor force in the United States, which equals the labor force times it productivity (which measures how much output the labor force can produce), is much larger than it appears to be when we just count people.
– If labor is more productive in the United States, then the United States is abundant in skilled labor (like R&D scientists), and it should be no surprise that it is exporting labor-intensive products.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 8)
• Evolution of Factor Endowments in China and the United States
– Revisiting How to Measure Factor Abundance
– We define effective factor endowment as the actual amount of a factor found in a country times its productivity.
Effective factor endowment =
Actual factor endowment • factor productivity
– The amount of an effective factor found in the world is obtained by adding up the effective factor endowments across all countries.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 9)
• Evolution of Factor Endowments in China and the United States
– Revisiting How to Measure Factor Abundance
– To determine whether a country is abundant in a certain factor, we compare the country’s share of that effective factor with its share of world GDP.
– If its share of an effective factor exceeds its share of world GDP, we conclude that the country is abundant in that effective factor. If its share of an effective factor is less than its share of world GDP, we conclude the country is scarce in that effective factor.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 10)
• Evolution of Factor Endowments in China and the United States
Revisiting How to Measure Factor Abundance
Effective R&D Scientists: The productivity of an R&D scientist depends on laboratory equipment, computers, and other types of material with which the scientist has to work.
Effective R&D scientists =
Actual number of R&D scientists • R&D spending per scientist
Effective Arable Land: Compares output in each country with the inputs of labor, capital, and land.
Effective arable land = Actual arable land • Productivity in agriculture
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 11)
• Evolution of Factor Endowments in China and the United States
FIGURE 4-7 (1 of 2) Actual and Effective Factor Endowments, China, 2000–2017
Shown are the actual endowments in capital, R&D scientists, and arable land for China, as well as the effective factor endowments in R&D scientists and arable land for China, in selected years from 2000 to 2017. Also shown is China’s share of world GDP. China’s share of world capital has more than doubled, to 20.5% in 2017.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 12)
• Evolution of Factor Endowments in China and the United
FIGURE 4-7 (2 of 2) Actual and Effective Factor Endowments, China, 2000–2017
China’s share of R&D scientists has been about 20% since 2010, but its effective share of R&D scientists has been at that level only since 2017. So China’s abundance of R&D scientists is a recent phenomenon.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 13)
• Evolution of Factor Endowments in China and the United
FIGURE 4-8 (1 of 2) Actual and Effective Factor Endowments, United States, 2000–2017
Shown are the actual endowments in capital, R&D scientists, and land, as well as the effective factor endowments in R&D scientists and land, in selected years from 2000 to 2017. The United States’ share of the world capital endowment has fallen over time, as other countries, like China, have grown in capital.
© 2021 Worth Publishers International Economics, 5e | Feenstra/Taylor
2) Testing the Heckscher– (part 14)
• Evolution of Factor Endowments in China and the United States
FIGURE 4-8 (2 of 2) Actual and Effective Factor Endowments, Unit
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