INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 1 Heckscher-Ohlin To demonstrate the Heckscher-Ohlin (HO) result we will use some of the earlier results, in particular Factor Price Equalization 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 labor 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 (FPE) and the Rybczynski (Ryb) theorem. It is the of the four basic results that requires only identical homothetic preferences 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 labor and good X is (rel.) more capital-intensive

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 2 Here is the green ppf of country B, it produces at point B p 0 X (cap int) Y (lab int) B BpBp Country A has more capital and less labor, so we can trace first the Capital and then the Labor Ryb-line to arrive at country A’s production point A p more capital less labor more capital ApAp Or we could take the other route and first trace the Labor and then the Capital Ryb-line The end result is obviously the same. Heckscher-Ohlin

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 3 This is where the assumption of identical homothetic preferences comes in Through country A’s production point A p we can also draw a ppf. B BpBp At the int. eq. trade prices for goods X and Y the income line is tangent for country A at A p and for country B at B p A Both countries consume somewhere along their own income line, however the ratio with which goods X and Y are consumed is the same Heckscher-Ohlin ApAp 0 Y (lab int) X (cap int)

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 4 Naturally, to be an international equilibrium the trade triangles have to match (reciprocally) If we know country B’s consumption point B c along its income line, extending a line from the origin through B c determines country A’s consumption point A c along its income line. This can only occur if the consumption ratio is in between A p and B p (as drawn) BpBp 0 ApAp BcBc AcAc Heckscher-Ohlin Y (lab int) X (cap int)

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 5 Since the consumption ratio is in between A p and B p country B, which has relatively more labor than country A, exports good Y, which uses labor relatively intensively. BpBp 0 X ApAp BcBc AcAc The reverse holds for country A (it has rel. more capital and exports good X which uses capital rel. intensively). According to the HO result a country exports the good which makes intensive use of its abundant factor of production Heckscher-Ohlin Y (lab int) X (cap int)