Chapter 5

Resources and Trade

The Heckscher-Ohlin Model
Preview

• Assumptions of the Heckscher-Ohlin model

• Production possibilities
• Choosing the mix of inputs
• Relations among factor prices, goods prices,
resources and output
• Trade in the Heckscher-Ohlin model
• Trade and income distribution
• Empirical evidence
 Introduction
• In addition to differences in labor productivity, trade
occurs due to differences in resources across countries.
• The Heckscher-Ohlin theory argues that trade occurs
due to differences in labor, labor skills, physical
capital, capital, or other factors of production across
countries. Relative abundance: like the human resource, natural resource
ASSUMPTION
– Countries have different relative abundance of factors of
production. Vietnam

– Production processes use factors of production with different

relative intensity. Example: Between the aircraft and footwear, footwear needs much more
labour but the aircraft needs much more capital. It is called capital intensity
industry or labour intensity industry

- Physical capital includes cash and equipment

The reason that makes Vietnam export the electricity the most
because of Samsung or other companies comes to VN for
manufacturing and sales
 Two-Factor Heckscher-Ohlin Model –
2x2x2 model 2 factors x 2 countries x 2 products
1. Two countries: home and foreign, both have the same
technology
2. Two goods: cloth (C) and food (F).
3. Two factors of production: labor (L) and capital (K).
percentage
4. The mix of labor and capital used varies across goods.
– cloth is labor-intensive and food is capital-intensive
5. The supply of labor and capital in each country is
constant and varies across countries.
6. In the long run, both labor and capital can move
across sectors, equalizing their returns (wage and
rental rate) across sectors.
capital needed to rent
 Production Possibilities
• Numerical example:
K = 3000, total amount of capital
L = 2000, total amount of labor
• Suppose a fixed mix of capital and labor in each sector.
aKC = 2, capital used to produce one yard of cloth
aLC = 2, labor used to produce one yard of cloth
aKF = 3, capital used to produce one calorie of food
aLF = 1, labor used to produce one calorie of food

=> use the percentage to explain production of food is more capital intensity than the production of cloth
aKF/aLF = 3 (capital intensity) Thâm dụng vốn của thức ăn nhiều hơn thâm dụng vốn của cloth
aLC/aKC = 1 (not can be concluded)
Production Possibilities

• Production possibilities are influenced by both

capital and labor:

aKCQC + aKFQF ≤ K Total amount of

capital resources

Capital used for Capital used for

Total calories of
each yard of cloth Total yards of each calorie of
food production
production cloth production food production

aLCQC + aLFQF ≤ L Total amount of

labor resources

Labor used for Labor required for

each yard of cloth each calorie of
production food production
 Production Possibilities

• Constraint on capital:
2QC + 3QF ≤ 3000
• Constraint on labor:
2QC + QF ≤ 2000
• Economy must produce subject to both
constraints – i.e., it must have enough capital
and labor.
• Without factor substitution, the production
possibilities frontier is the interior of the two
factor constraints.
 The Production Possibility Frontier
without Factor Substitution
Về ôn lại OR 2QC + 3QF ≤ 3000
2QC + QF ≤ 2000
→ These constrains are binding

- What if produce only

1000 units of food?
- What if produce only
1000 units of cloth?
- At which point will all
resources be
Answers: employed?
- 1st circumstance:
Vẽ cái curve
- 2nd circumstance: exceed labor
- All resources be employed at the intersection between 2 contraints (500 food and 750 cloth)
Fig. 5-2: The Production Possibility
Frontier with Factor Substitution
The PPF equations from previous
slides do not allow substitution
of capital for labor in production.
If producers can substitute one
input for another in the
production process, then the PPF
is curved (bowed).
Opportunity cost of cloth
increases as producers make
more cloth.

what the country should produce?

=> Depended on price
Factor Prices and Input Choices
Factor Prices and Input Choices
the food curve is below the cloth curve because
- production of food is capital intensitive so the ratio of factor price: w/r
L/K is smaller than the ratio of L/K (production of input choice: L/K
cloth) the downward sloping because
ratio w/r is slow => more workers => less
capital => ratio L/K is higher
Factor Prices and Goods Prices
In competitive markets, the
Relative price = Goods price
price of a good should equal
its cost of production, which
depends on the factor prices.
wage increases => relative price increases
How changes in the wage and
rent affect the cost of
producing a good depends on
the mix of factors used.
An increase in the rental rate
of capital should affect the
price of food more than the
price of cloth since food is the
capital intensive industry.
Changes in w/r are positively
tied to changes in PC /PW.

Wage rental ratio is factor price

Factor Prices and Goods Prices
From Goods Prices to Input Choices
Relative price of cloth increases
=> the labor capital ratioo of
cloth increases and the labor
capital ratio of food decreases
because the the cloth is labor
intensity and the food is capital
intensity
Factor Prices and Goods Prices

• Stolper-Samuelson theorem: If the

relative price of a good increases, then the
real wage or rental rate of the factor used
intensively in the production of that good
increases, while the real wage or rental rate
of the other factor decreases.
• Any change in the relative price of goods
alters the distribution of income.
thâm dụng lao động => công nhân được hưởng lợi, người cho vay sẽ ít hưởng lợi hơn

Các học thuyết giải thích lý do tại sao các quốc gia phải exchange trade (Có assumption của mỗi model)
- Học thuyết Ricardian: chuyên môn hóa vs mặt hạng khi chi phí cơ hội thấp hơn
- Học thuyết Stolper-Samuel: chuyên môn hóa vs mặt hàng khi dư thừa yếu tố sản xuát đó
Ví dụ VN chuyên môn hóa những mặt hàng sử dụng nhiều lao dọng vì VN là nước giàu lao động
Factor Prices and Goods Prices
 Factor Prices and Goods Prices

• An increase in the relative price of cloth, PC /PF,

is predicted to
– raise income of workers relative to that of capital
owners, w/r.
– raise the ratio of capital to labor services, K/L, used
in both industries.
– raise the real income (purchasing power) of workers
and lower the real income of capital owners, in terms
of both goods.
 Resources and Output

• An economy with a high ratio of labor to capital

produces a high output of cloth relative to food.
• Suppose that Home is relatively abundant in labor
and Foreign in capital:
L/K > L*/ K*
– Likewise, Home is relatively scarce in capital and Foreign in
labor.

• Home will be relatively efficient at producing cloth

because cloth is relatively labor intensive.
 Trade in the Heckscher-Ohlin Model

• The countries are assumed to have the same

technology and the same tastes.
• With the same technology, each economy has a
comparative advantage in producing the good that
relatively intensively uses the factors of production in
which the country is relatively well endowed.
• With the same tastes, the two countries will consume
cloth to food in the same ratio when faced with the
same relative price of cloth under free trade.
Trade Leads to a Convergence of Relative
Prices
Since cloth is relatively
labor intensive, at each
relative price of cloth to
food, Home will produce a
higher ratio of cloth to food
than Foreign.
Home will have a larger
relative supply of cloth to
food than Foreign.
Like the Ricardian model,
the Heckscher-Ohlin model
predicts a convergence of
relative prices with trade.
In Ricardian, we can narrow down the gap
and similar to this model
 Fig. 5-9: Trade Leads to a Convergence
of Relative Prices
With trade, the relative price
of cloth rises in the relatively
labor abundant (home)
country and falls in the
relatively labor scarce
(foreign) country.
In Home, the rise in the
relative price of cloth leads
to a rise in the relative
production of cloth and a fall
in relative consumption of
cloth.
Home becomes an exporter
of cloth and an importer of
food. Foreign becomes an
importer of cloth and an
price goes up => production goes up as well exporter of food.
Price goes up => domestic consumption is down => export
Trade in the Heckscher-Ohlin Model

• Heckscher-Ohlin theorem: The country

that is abundant in a factor exports the
good whose production is intensive in that
factor.
• This result generalizes to a correlation:
– Countries tend to export goods whose
production is intensive in factors with which the
countries are abundantly endowed.
 Trade and the Distribution of
Income
• Changes in relative prices can affect the earnings of
labor and capital.
– A rise in the price of cloth raises the purchasing power of labor
in terms of both goods while lowering the purchasing power of
capital in terms of both goods.
– A rise in the price of food has the reverse effect.
• Thus, international trade can affect the distribution of
income, even in the long run:
– Owners of a country’s abundant factors gain from trade, but
owners of a country’s scarce factors lose.
– Factors of production that are used intensively by the import-
competing industry are hurt by the opening of trade –
regardless of the industry in which they are employed.
 North-South Trade and Income Inequality

• Compared with the rest of the world, the United

States is abundantly endowed with highly skilled labor
while low-skilled labor is correspondingly scarce.
• Over the last 40 years, countries like South Korea,
Mexico, and China have exported to the U.S. goods
intensive in unskilled labor (ex., clothing, shoes, toys,
assembled goods).
• At the same time, income inequality has increased in
the U.S., as wages of unskilled workers have grown
slowly compared to those of skilled workers.
- quốc gia sẵn có và dư thừa lao động thì
the reason that the counries trade between each other chuyên môn hóa hàng khi sử dụng lao động
- different labour productivity - giá của mặt hàng tăng => tiền của thứ
- different capital intensity tăng
=> choose the area that we specialize in the resources abundant Ví dụ giá máy bay tăng thì giá vốn tăng, giá
đồ may mặc tăng thì lương người lao động
tăng
EXERCISE