Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Introduction International Trade & the World Economy;  Charles van Marrewijk Bertil Ohlin ( )

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Heckscher - Ohlin International Trade & the World Economy;  Charles van Marrewijk Heckscher-Ohlin proposition In a neo-classical framework with 2 final goods, 2 factors of production, and 2 countries which have identical homothetic tastes, a country will export the good which intensively uses the relatively abundant factor of production. If the production of manufactures is capital intensive and Austria is capital abundant, Austria will export manufactures and import food.

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

All previous neo-classical results depend only on the supply side, sincewe have to specify the demand side to make conclusions about trade flows. Demand International Trade & the World Economy;  Charles van Marrewijk Maximizing the utility function subject to a standard budget contraint implies that consumers will spent a fraction of their income on manufactures (quite similar to cost minimization problem for producers)

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

The production possibility frontier International Trade & the World Economy;  Charles van Marrewijk With crs and 2 factors of production the ppf is concave to the origin

The production possibility frontier International Trade & the World Economy;  Charles van Marrewijk The curvature of the ppf depends on the difference in capital intensity for the production of food and manufactures

The production possibility frontier International Trade & the World Economy;  Charles van Marrewijk Increase in capital stock leads to outward shift of ppf biased in the direction of capital intensive manufactures; tangency points at constant prices is straight line (Ryb)

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Structure of the equilibrium International Trade & the World Economy;  Charles van Marrewijk

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Autarky equilibrium

International Trade & the World Economy;  Charles van Marrewijk Autarky equilibrium Autarky in 2 countries (A and B) Capital abundant A produces relatively more capital intensive manufactures at relatively lower price

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

International trade equilibrium For A price of manufactures rises: capital abundant A produces even more capital intensive manufactures and exports these in exchange for food

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Application: the Summers-Heston data International Trade & the World Economy;  Charles van Marrewijk Hypothetical production/worker in autarky using Summers-Heston data

Application: the Summers-Heston data International Trade & the World Economy;  Charles van Marrewijk Hypothetical production/worker in free trade w. Summers-Heston data

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

The case of the missing trade International Trade & the World Economy;  Charles van Marrewijk First important empirical study (1956) leads to ‘Leontief paradox’: supposedly capital abundant USA imports capital intensive goods? Possible explanations: demand bias, factor-intensity reversal, restrictiveness of 2  2  2 framework. Later studies, e.g. Bowen, Leamer, and Sveikauskas (1987), analyze more goods, more factors, more countries, as did Trefler (1995) who finds modest support for neo-classical trade model (about 71%) shows that factor service trade is smaller than factor endowments prediction (case of missing trade) support increases if technological differences (part I of the book) are taken into consideration (to about 78%) support increases if domestic demand bias is taken into consideration (to about 87%) with neo-classical model, different technology, and demand bias about 93% of international trade flows can be explained.

Introduction Heckscher - Ohlin Demand The production possibility frontier Structure of the equilibrium Autarky equilibrium International trade equilibrium Application: the Summers-Heston data The case of the missing trade Conclusions CHAPTER 7; FACTOR ABUNDANCE International Trade & the World Economy;  Charles van Marrewijk

Conclusions International Trade & the World Economy;  Charles van Marrewijk Neo-classical model: assumes identical homothetic preferences; neutralize demand effects countries with high capital-labor ratio have high wage-rental ratio in autarky and low relative price of capital intensive good free trade equalizes final goods prices (and thus factor prices; FPE) capital abundant country exports capital intensive good (HOS) free trade increases production, global efficiency, and welfare extended version of the model performs reasonably well empirically technology intensive manufacturing exports mainly in OECD countries (next slide)

Conclusions International Trade & the World Economy;  Charles van Marrewijk Technology intensive man.; share of exports (%), 1998; Source: ITC