the heckscher-ohlin model: features, flaws, and fixes iii: so what do we, like, do? alan v....
TRANSCRIPT
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The Heckscher-Ohlin Model: Features, Flaws, and Fixes
III: So What Do We, Like, Do?
Alan V. Deardorff
University of Michigan
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Nottingham III 2
Themes of the 3 Lectures, Again
• The HO Model is largely well behaved in 2 dimensions, even when you include trade costs
• In higher dimensions, it is not so well behaved, especially when you include trade costs
Various modifications and extensions of the HO model offer some promise of making it behave better
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Nottingham III 3
Outline
• Ways to Make HO Behave?– Specific factors– Armington Preferences– Lumpy Countries– Monopolistic Competition– Heterogeneous Firms– Variable Trade Costs– Aggregation
• Conclusion
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Nottingham III 4
Ways to Make HO Behave?
• Not a new question• CGE modelers have had to deal with it
– Models based too closely on HO don’t fit the data
– Most obviously (for me, via Bob Stern): Estimates of price elasticities of imports are much smaller than they would be in HO models taken literally
– We’ve used several of the fixes mentioned here
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Nottingham III 5
Specific Factors
• Also called the Ricardo-Viner Model, this was how Samuelson (1971) and Jones (1971) got the HO Model to behave
• Each sector has its own “specific factor” = Factor that is either
• useless in, or • immobile to and from,
all other sectors
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Nottingham III 6
Specific Factors
• Implications– Supplies likely remain positive at all prices– Supplies increase smoothly with price– There is no indeterminacy– Trade does not equalize factor prices (Hence,
“Ohlin was right”)
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Nottingham III 7
Specific Factors
• Problems– Makes perfect sense for short run, but not for
long run– Doesn’t solve problem of hypersensitivity of
bilateral trade to trade costs– With specific factor in each industry, model no
longer “explains” trade, except tautologically: countries export products of their abundant specific factors
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Nottingham III 8
Armington Preferences
• Due to Armington (1969), who used it in a macroeconomic, not HO, context
• Products are differentiated by country of origin
• Examples?– French wine– Italian shoes– Swiss watches
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Nottingham III 9
Armington Preferences
• Implications– Trade need not equalize prices of same
“good” from different countries– Trade elasticities much reduced
• hence hypersensitivity eliminated
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Nottingham III 10
Armington Preferences
• Problems– Trade now depends preference parameters
as well as on factor endowments• France exports wine because people like French
wine, etc.• (This is fine in CGE models, which don’t seek to
explain trade, but use trade data to inform trade policy)
– Preferences give every country market power in trade
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Nottingham III 11
Lumpy Countries
• Due to Courant and Deardorff (1992)
• Countries have multiple regions, across which there is not FPE
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Nottingham III 12
Lumpy Countries
• Implications– May alter pattern of trade from HO prediction– Internal regions may specialize– Regional limits on trade? Hence lower
elasticities?– Specialization at regional level without
specialization nationally? Hence less specialization?
– Continuum of regions?
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Nottingham III 13
Lumpy Countries
• Problems?– Don’t know yet– Hardly any of this has been worked out
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Nottingham III 14
Monopolistic Competition
• Helpman and Krugman (1985) put this in HO trade models, building on Spence-Dixit-Stiglitz preferences. Romalis (2004) generalized for empirical work
• Goods are differentiated by firm, while increasing returns at the firm level limit product variety
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Nottingham III 15
Monopolistic Competition
• Implications– Most obviously, model explains intra-industry
trade– Implications for specialization and factor
prices are the same as the standard HO Model, so it does not help much with some of that
– Product-differentiated bilateral exports remain positive from any country that produces, avoiding hypersensitivity to trade costs
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Nottingham III 16
Monopolistic Competition
• Problems– Only makes sense for (some) manufactures
and services, not for agricultural products, minerals, or some other inputs
– Doesn't change extremes of specialization
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Nottingham III 17
Heterogeneous Firms
• Melitz (2003) put this into trade theory, following Hopenhayn (1992). Bernard, Redding, and Schott (2005) put it in the HO model
• Individual firms each have a randomly chosen productivity parameter, as well as differentiated products
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Nottingham III 18
Heterogeneous Firms
• Implications– Industry gets small, but doesn’t disappear,
when factor prices move against it, since most productive firms survive
– Thus avoids extremes of specialization– Supply responds to prices through entry or
survival of less productive firms
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Nottingham III 19
Heterogeneous Firms
• Problems– Hard!
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Nottingham III 20
Variable Trade Costs
• I (think I) suggested in Deardorff (1984) that HO would be better behaved if trade costs varied appropriately
• Assume that trade costs for a particular good along a particular route (pair of countries) rise with the volume of trade
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Nottingham III 21
Variable Trade Costs
• Implications– This makes bilateral export supply curves
upward sloping even when supplies of goods are infinitely elastic
– Indeterminacy of trade is eliminated– Volume of trade may then vary smoothly with
size of autarky price differences
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Nottingham III 22
Variable Trade Costs
• Problems– Hard to imagine that this assumption could be
valid• If anything, transport seems more likely to have
decreasing costs, not increasing
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Nottingham III 23
Aggregation
• Davis and Weinstein (2001) suggest this in motivating part of their empirical work
• Industries that are observable are actually aggregates of unobservable industries with heterogeneous factor intensities
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Nottingham III 24
Aggregation
• Implications– Observed industries represent different mixes in
different countries, leading to cross-country correlation between factor endowments and factor intensities, even with FPE (Davis and Weinstein)
– In a multi-cone model, even though countries specialize in actual industries, observed industries operate at positive output due to products that unobservably belong to another cone
– In response to price changes, instead of whole observed industry responding hypersensitively, only unobserved components do and observed industry responds gradually.
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Nottingham III 25
Aggregation
• Problems– This has not been worked out as a formal
model (I think)
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Nottingham III 26
Conclusion
• It is unlikely that any one of these fixes will take hold by itself
• More likely that trade theorists will– Continue to use the unmodified HO model for most
purposes– Choose among these fixes when necessary to deal
with particular issues where flaws are most serious– Use several of these at once (as in Davis and
Weinstein) as basis for empirical work• Meanwhile, I will dream of a single fix that will
make the HO Model both– Better behaved, and– As simple to use as the Lerner Diagram