1. HO and Factor Price Equalization

2. Does Heckscher – Ohlin explain trade patterns?
To test HO we need data on:
Factor endowments for each country
Factor proportions used in the production of different goods (Factor Intensity)
Data on trade patterns of goods produced

3. First test: wassily Leontif (1954)
At the time the US was widely believed to be Kabundant & Lscarce : Were we?
HO predicts:
US should export Kintensive goods & import Lintensive goods.
Leontif tested the proposition by analyzing the K/L ratio for US 200 export and import industries using 1947 trade data.
Define: 𝐾 𝐿 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 = factor ratio of US exports
Define: 𝐾 𝐿 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 = factor ratio for US imports
If US exports are Kabundant then:
HO suggests we should see: 𝐾 𝐿 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 > 𝐾 𝐿 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 → 𝐾 𝐿 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝐾 𝐿 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 < 1

4. Leontief Paradox
HO suggests we should see: 𝐾 𝐿 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 > 𝐾 𝐿 𝑖𝑚𝑝𝑜𝑟𝑡𝑠
Instead: 𝐾 𝐿 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 = $14,015 < 𝐾 𝐿 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 =$18,184
𝐾 𝐿 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝐾 𝐿 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 = $18,184 $14,015 =1.30→𝑈𝑆 𝑖𝑚𝑝𝑜𝑟𝑡𝑠 𝑎𝑟𝑒 30% 𝑚𝑜𝑟𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑣𝑒 𝑡ℎ𝑎𝑛 𝑈𝑆 𝑒𝑥𝑝𝑜𝑟𝑡𝑠

5. Why are US exports less capital intensive
Wide rage of explanations
Countries may differ in technology: US and foreign technologies are not the same
By focusing on L and K, Leontief ignored land abundance in the US.
Leontief should have distinguished between skilled and unskilled labor.
1947 data may have been weird because WWII just ended two years prior.
US trade was not completely free (also assumed by HO – though we did not emphasize it).

6. What do we know?
Thus it is most simple version, HO models does a poor job of explaining overall trade patterns (especially for mfg goods)
What about factor endowments?
HO assumes: countries differ in factor endowments
Why? We want to know the relative abundance/scarcity of a factor within a country
Definition of Factor Abundant: When a country’s world share of a factor is larger than its world share of GDP
Definition of Factor Scarce: When a country’s world share of a factor share is less than its world share of GDP

7. Differences in factor endowments (2010)
F&T International Trade 2nd edition p. 101
Robert C. Feenstra and Alan M. Taylor
International Trade, Third Edition / International Economics, Third Edition Copyright © 2014 by Worth Publishers

8. Hmmmm…..
These results causes us to wonder whether an R&D scientist or unit of capital has the same productivity across all countries
Recall HO assumes same technology
Leontief, himself, suggested abandoning HO assumption of same technology
Recall Leontief found: US exported labor intensive goods
What if: labor may be more productive in the US (and less productive in the ROW).
How to calculate “effective labor force”
Effective labor: = labor force x productivity
productivity = how much output the factor can produce with one unit of labor
Effective factor endowment = actual factor endowment x factor productivity
Effective R&D scientist = actual R&D scientist endowment x R&D spending per scientist
Effective labor = population x wages

9. Differences in effective factor endowments (2010)
F&T International Trade 2nd edition p. 101
Robert C. Feenstra and Alan M. Taylor
International Trade, Third Edition / International Economics, Third Edition Copyright © 2014 by Worth Publishers

10. U.S. Food Trade and Total Agricultural Trade,
Table 4.2 U.S. Food Trade and Total Agricultural Trade, 2000–2009 Feenstra and Taylor: International Trade, Second Edition Copyright © 2011 by Worth Publishers

11. Labor Endowment and GDP for the U.S. and Rest of the World, 1947
Leontif Paradox again with effective labor:
Consider US labor abundance (1947 again).
Labor = US population in each country (rough measure of labor force)
Effective Labor = US population x wages (rough estimate of worker productivity)
US had 43% of the world’s effective labor as compared to 37% of world GDP
US was abundant in effective labor.
HO predicts US should produce and exports labor intensive goods
Robert C. Feenstra and Alan M. Taylor
International Trade, Third Edition / International Economics, Third Edition Copyright © 2014 by Worth Publishers

12. Factor Price Equalization – does it hold?
Index of hourly compensation cost for manufacturing workers in 2012, US = 100
Norway
178
Sweden
140
Germany
128
France
112
Canada
103
United Kingdom 88
Greece 54
Brazil 31
Mexico 18
Philippines 6
Why persistent differences in factor prices?
Income inequality (wage differences) across countries results from uneven ownership of human capital.
HO assumes all labor is identical, but labor across countries differs in terms of human capital: educ., training, skill.
HO assumes all countries use the same technology. This does not hold – especially between developed and developing countries
Thus returns paid to resource owners will not equalize if technology for producing goods differ
Machinery workers in Germany use superior production technologies than Vietnamese workers
HO assumes no transportation costs and trade barriers when in fact they are quite prevalent
Market imperfections reduce the volume of trade, limiting the extent to which product prices and thus factor prices can equalize.
US Bureau of Labor Statistics