Heckscher-Ohlin; 1

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

onlyidentical 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

Charles van Marrewijk

Here is the green ppf of country B, it produces at point Bp

0 X (cap int)

Y(lab int)

BBp

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 Ap

more capital

less labor

less labor

more capital Ap

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.

Charles van Marrewijk

Heckscher-Ohlin; 2

This is where the assumption of identical homothetic preferences comes in

Through country A’s production point Ap we can also draw a ppf.

BBp

At the int. eq. trade prices for goods X and Y the income line is tangent for country A at Ap and for country B at Bp

A

Both countries consume somewhere along their own income line, however the ratio with which goods X and Y are consumed is the same

Charles van Marrewijk

Heckscher-Ohlin; 3

Ap

0

Y(lab int)

X (cap int)

Study Guide Figure 8

Naturally, to be an international equilibrium the trade triangles have to match (reciprocally)

If we know country B’s consumption point Bc along its income line, extending a line from the origin through Bc determines country A’s consumption point Ac along its income line.

This can only occur if the consumption ratio is in between Ap and Bp (as drawn)

Bp

0

Ap

Bc

Ac

Charles van Marrewijk

Heckscher-Ohlin; 4

Y(lab int)

X (cap int)

Since the consumption ratio is in between Ap and Bp country B, which has relatively more labor than country A, exports good Y, which uses labor relatively intensively.

Bp

0 X

Ap

Bc

Ac

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

Charles van Marrewijk

Heckscher-Ohlin; 5

Y(lab int)

X (cap int)