introduction heckscher

Introduction

Heckscher - Ohlin

Demand

The production possibility frontier

Structure of the equilibrium

Autarky equilibrium

International trade equilibrium

Application: the Summers-Heston data

The case of the missing trade

Conclusions

CHAPTER 7; FACTOR ABUNDANCEInternational Trade & the World Economy; Charles van Marrewijk

Explanations for trade

Classical 2. Opportunity costs 3. Comparative advantage

Neo-classical 4. Production structure 5. Factor prices 6. Production volume 7. Factor abundance

1. The world economy

New trade 9. Imperfect competition 10. Intra-industry trade

Policy

8. Trade policy

11. Strategic trade policy

12. Int. trade organizations 13. Economic integration

17. Applied trade policy modeling

Economicgeography

New interactions 14. Geographical economics 15. Multinationals 16. New goods, growth, and development

Industrialorganization

Internationalbusiness

Growth theory

Part

IP

art

IIPa

rt I

IIPa

rt I

V

18. Concluding remarks

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


Introduction International Trade & the World Economy; Charles van Marrewijk

Objectives / key terms

Heckscher-Ohlin result Homothetic demand

Rybczynski lines Marginal rate of substitution (MRS)

Marginal rate of transformation (MRT) Leontief paradox

Autarky International trade

General equilibrium Missing trade

Bertil Ohlin (1899-1979)

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


Heckscher - OhlinInternational Trade & the World Economy; Charles van Marrewijk

Heckscher-Ohlin propositionIn a neo-classical framework with 2 final goods, 2 factors of production, and 2 countries which have identical homothetic tastes, a country will export the good which intensively uses the relatively abundant factor of production.

If the production of manufactures is capital intensive and Austria is capital abundant, Austria will export manufactures and import food.

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


All previous neo-classical results depend only on the supply side, since we have to specify the demand side to make conclusions about trade flows.

DemandInternational Trade & the World Economy; Charles van Marrewijk

nconsumptioproductionexports

Maximizing the utility function

subject to a standard budget contraint implies that consumers will spent a fraction of their income on manufactures (quite similar to cost minimization problem for producers)

10;1 mfm

mm CCU

m

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


The production possibility frontier International Trade & the World Economy; Charles van Marrewijk

0

1

2

3

4

5

6

0 1 2 3 4 5 6

Manufactures

Foo

d

With crs and 2 factors of production the ppf is concave to the origin


0

1

2

3

4

5

6

0 1 2 3 4 5 6

Manufactures

Foo

d

3.0m

7.0m

9.0m

The curvature of the ppf depends on the difference in capital intensity for the production of food and manufactures


0

1

2

3

4

5

6

0 1 2 3 4 5 6 7 8

Manufactures

Foo

d

K = 2 K = 5 K = 8

A

B

C

capital Rybczynksi

line

Increase in capital stock leads to outward shift of ppf biased in the direction of capital intensive manufactures; tangency points at constant prices is straight line (Ryb)

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


Structure of the equilibrium International Trade & the World Economy; Charles van Marrewijk

Laborers

Capitalowners

Production ofManufactures

Productionof Food

capital services(rental income)

labor services(wage income)

delivery of manufactures

delivery of food

(spending m on manufactures)

(spending 1-m on food)

direction of goods flows

(direction of money flows)

consumers

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


International Trade & the World Economy; Charles van Marrewijk

0

1

2

3

4

5

6

0 1 2 3 4 5 6

Manufactures

Foo

d

ppf

income welfare

(slope = MRS)

(slope = MRT)

(slope

= pm/pf ) line

autarky production

autarky consumption

Autarky equilibrium

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7Manufactures

Foo

d

ppfA

ppfB

UA

UB

autarkyB

autarkyA


Autarky equilibrium

Autarky in 2 countries (A and B)

Capital abundant A produces relatively more capital intensive manufactures at relatively lower price

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7Manufactures

Foo

d

ppfA

ppfB

UA

UB

autB

autA

prB

prA

coB

coA

exportm

exportf

importm

imp

ort

f



For A price of manufactures rises: capital abundant A produces even more capital intensive manufactures and exports these in exchange for food

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


Application: the Summers-Heston data International Trade & the World Economy; Charles van Marrewijk

b. hypothetical autarky production per worker

0

1

0 1 2 3manufactures

food Austria

Norway

Bolivia

Zambia

Hypothetical production/worker in autarky using Summers-Heston data

Application: the Summers-Heston data International Trade & the World Economy; Charles van Marrewijk

hypothetical production per worker with trade

0

1

0 1 2 3 4manufactures

food

Norway

Austria production

Bolivia

Zambia

Austria consumption point

consumption expansion path

Austria income line

Hypothetical production/worker in free trade w. Summers-Heston data

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


The case of the missing tradeInternational Trade & the World Economy; Charles van Marrewijk

First important empirical study (1956) leads to ‘Leontief paradox’: supposedly capital abundant USA imports capital intensive goods?

Possible explanations: demand bias, factor-intensity reversal, restrictiveness of 22 2 framework.

Later studies, e.g. Bowen, Leamer, and Sveikauskas (1987), analyze more goods, more factors, more countries, as did Trefler (1995) who

• finds modest support for neo-classical trade model (about 71%)

• shows that factor service trade is smaller than factor endowments prediction (case of missing trade)

• support increases if technological differences (part I of the book) are taken into consideration (to about 78%)

• support increases if domestic demand bias is taken into consideration (to about 87%)

• with neo-classical model, different technology, and demand bias about 93% of international trade flows can be explained.

Introduction

Heckscher - Ohlin

Demand



Autarky equilibrium




Conclusions


Conclusions International Trade & the World Economy; Charles van Marrewijk

Neo-classical model:

• assumes identical homothetic preferences; neutralize demand effects

• countries with high capital-labor ratio have high wage-rental ratio in autarky and low relative price of capital intensive good

• free trade equalizes final goods prices (and thus factor prices; FPE)

• capital abundant country exports capital intensive good (HOS)

• free trade increases production, global efficiency, and welfare

• extended version of the model performs reasonably well empirically

• technology intensive manufacturing exports mainly in OECD countries (next slide)

ConclusionsInternational Trade & the World Economy; Charles van Marrewijk

Technology intensive man.; share of exports (%), 1998; Source: ITC

technology int. man. share of exports (%)

25.2 to 76.4 (30)12.4 to 25.2 (31)

4.3 to 12.4 (29)1.7 to 4.3 (28)0 to 1.7 (33)

introduction heckscher - ohlin demand the production possibility frontier structure of the...

Documents

demand international

trade flows

production of manufactures

factors of production

production of food

abundant factor of production

origin slide