Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model) The Explanation of International Trade: Differences across countries in relative abundance of factors of production. Assumptions:Identical Technologies Identical Demand Patterns

Factor Intensity : Full employment Y X A B L constant K constant Structural Bias: The Transformation Curve( = ABC) shifts asymmetrically with unbalanced changes in K and L. A Rise in K, with no change in L, leads to an increase(fall) in X (Y)). CD B’B’

AT POINT C 1) Labor is unemployed: W=0. (2) X-industry is active Y-industry is inactive. Therefore: AT POINT A 1) Capital is unemployed: R=0. (2) Y-industry is active X-industry is inactive. Therefore:

AT Point A(continue):

At Point B Relative Supply

The Bias in Relative Supply Two Countries: H and F (H is more capital abundant)

Free Trade and Autarkic Equilibria =Free trade 1=autarky in H 3=autarky in F

Full Employment Supply of X and Y :

Heckscher-Ohlin Proposition #1: The country exports the good which is intensive in the use of the factor with relative abundance.

Full Employment Factor Prices:

Income Distribution and International Trade R W A B B’ D C ABC=factor price frontier A rise in (X is capital intensive) will raise R and decrease W. Industry X-Line Industry Y-Line

Heckscher-Ohlin Proposition #2(dual to Proposition #1): Free trade causes an increase in the factor price of the factor of production which is used intensively in the export industry and a fall in the factor price used intensively in the import competing industry.