1. International Economics By Robert J. Carbaugh 7th Edition
Chapter 4:
Trade model extensions and applications

2. Factor endowment theory (Heckscher-Ohlin)
Why relative price differentials?
Factor endowment theory (Heckscher-Ohlin)
Comparative advantage is explained entirely by different national supply conditions, especially resource endowments
Nations export products that use inputs which are relatively abundant (cheap) at home, and import products which need inputs which are relatively scarce (expensive) at home
Carbaugh, Chap. 4

3. Factor endowment theory: assumptions
Why relative price differentials?
Factor endowment theory: assumptions
Nations all have the same tastes and preferences (same indifference curves)
They use factor inputs which are of uniform quality
They all use the same technology
Carbaugh, Chap. 4

4. Comparative advantage according to factor endowment theory
Factor endowment model
Comparative advantage according to factor endowment theory
Autarky equilibrium
France’s transformation schedule F 21
Germany’s transformation schedule
Wheat (land-intensive) G 15 II I tG tF 14 20
Autos (capital-intensive)
Carbaugh, Chap. 4

5. Comparative advantage according to factor endowment theory
Factor endowment model
Comparative advantage according to factor endowment theory
Post-trade equilibrium
France’s transformation schedule 30 F’ F
Germany’s transformation schedule H
Wheat (land-intensive) 20 G 10 G’ II tt 6 18 30
Autos (capital-intensive)
Carbaugh, Chap. 4

6. Factor endowment theory: implications
Factor endowment model
Factor endowment theory: implications
Factor price equalization
Shift within each nation towards use of cheaper factors, and away from expensive ones, leads to more equal factor prices
Distribution of income
Trade changes domestic distribution of income as demand for different factors changes
Carbaugh, Chap. 4

7. Specific factor theory
Bringing theory closer to reality
Specific factor theory
Looks at the income distribution effects of trade in the short run, when some factor inputs are not mobile among sectors
Indicates that workers may be better or worse off, depending on preferences
Predicts that owners of factors used in export industries gain from trade, while owners of factors used in import-competing industries will lose from trade
Carbaugh, Chap. 4

8. Relative prices and the specific factor model
Bringing theory closer to reality
Relative prices and the specific factor model
US computer and steel industries C
DL’(C)
Wage/$
Wage/$
DL(C)
DL(S) 30 B 12 18 20 20 15 15 A
Labor used in computers
Labor used in steel 14
Total labor force (30 workers) 16
Carbaugh, Chap. 4

9. Economies of scale & specialization
Bringing theory closer to reality
Economies of scale & specialization
Economies of scale provide incentives for specialization, as per unit costs go down as production increases
Trade provides a larger potential market for products, making higher production levels possible
Carbaugh, Chap. 4

10. Economies of scale as basis for trade
Minimum efficient scale
10,000 B
8,000 C
7,500
ACMexico,US
Price (dollars)
100
200
275
Autos (thousands)
Carbaugh, Chap. 4

11. Trade & specialization under decreasing costs
Economies of scale
Trade & specialization under decreasing costs D
125
United States B
Computers A
South Korea C
100
Tons of Steel
Carbaugh, Chap. 4

12. Other extensions of the theory
Bringing theory closer to reality
Other extensions of the theory
Overlapping demands
Intra-industry trade
Product cycles
Dynamic comparative advantage - industrial policy
Carbaugh, Chap. 4

13. Free trade under increasing costs
Transportation costs
Free trade under increasing costs
No transportation costs
United States
Auto price ($ thous.) S
Canada D F 8 a b c d 6 E 4 D S
Autos 6 4 2 2 4 6
Autos
exports
imports
Carbaugh, Chap. 4

14. Free trade under increasing costs
Transportation costs
Free trade under increasing costs
Transportation costs of $2000 per auto
United States
Auto price ($ thous.) S
Canada D F 8 7 g h e f 5 4 E D S
Autos 5 4 3 3 4 5
Autos
exports
imports
Carbaugh, Chap. 4