2. Structure of the lecture
Heckscher-Ohlin theorem
Leontief paradox
Theorem of relative factor price equalization
Stolper-Samuelson theorem
Rybczynsky theorem
Dutch disease
Linders theory of overlapping demand
Theories based on products and innovation
3. Heckscher-Ohlin theorem - introduction
The main limitation of the classical theories of
international trat is that they use only one factor of
production – labour
In the real world must take into account the country's
factor endowment
This idea was introduced into international
economics by two Swedish economists – Eli
Heckscher a Bertil Ohlin
4. Eli Hekscher and Bertil Ohlin
Eli Hekscher (1879-1952)
Was a Swedish political economist and economic
historian
Important paper – The Effect of Foreign Trade on the
Distribution of Income
Bertil G. Ohlin (1899-1979)
Was a Swdish economist and politician – winner of the
Nobel prize for economics in 1977
Interregional and International Trade
5. Theoretical assumptions – identical with classical
theories
• 2*2 model (2 countries – 2 goods)
• Homogeneous goods
• Labor is homogeneous within a country but heterogeneous across
countries.
• Complete mobility of labor in the country and complete immobility of
labor across the country
• No transportation costs
• Full employment
• Production technology differences exist across industries and across
countries and are reflected in labor productivity parameters.
• The labor and goods markets are assumed to be perfectly competitive
in both countries.
• Firms are assumed to maximize profit while consumers (workers) are
assumed to maximize utility.
6. Theoretical assumptions – new assumptions
There are two factors of production – labour and capital
Both countries have identical production technology
The technologies used to produce the two commodities
differ
Different factor endowment in the model countries
Identical consumer preferences
7. Heckscher-Ohlin theorem – basic ideas
Comparative cost of the countries depends on the
cost of production
Production costs depend primarily on the price of
factors of production
The law of supply and demand stipulates that the
production factor that is abundant in the country, will
be a relatively inexpensive (and vice versa)
Production costs will therefore be low if it uses the
cheaper factor of production – the abundant
production factor.
8. Heckscher-Ohlin theorem – basic ideas
A country will export goods that use its abundant
factors intensively, and import goods that use its
scarce factors intensively.
A capital-abundant country will export the capital-
intensive good, while the labor-abundant country will
export the labor-intensive goods
HOT is also very often called as the factor
endowment theory
9. Heckscher-Ohlin theorem – example
Ireland and Swaziland – factor endowment
To calculate relative factor endowment we use the
capital/labour ratio K/L
Ireland: 124 bln./3,1 mil. = 40 000 USD
Swaziland: 5,6 bln./0,8 mil. = 7 000 USD
Labour force Capital
Ireland 3.1 millions 124 bln. USD
Swaziland 0.8 millions 5.6 bln. USD
10. Leontief paradox
In the period around World War II the HOT was
considered as the indisputable model of international
trade
But in 1953, Wassily Leontief shocked the scientific
community when he found that the United States—
the most capital-abundant country in the world—
exported labor-intensive commodities and imported
capital-intensive commodities, in contradiction with
Heckscher–Ohlin theory
Leontieff was one of the world's most respected
economists of his age
11. Leontief paradox – possible explanations
Leontief – the paradox is caused by the higher labour
productivity in the USA
Alternative 1 – Problems in the methodology
Wrong basis year for the analysis
No real statistics for factor endowment
Leontief omitted the import of the products not
produced in the USA
Usage of incorrect variables
12. Leontief paradox – possible explanation
Alternative 2 – questions of human capital
Alternative 3 – introducing natural resources
Alternative 4 – the basic assumption of HOT about
same consumer preferences is not valid
Alternative 5 – preference of domestic products
Alternative 6 – differences in technologies
Alternative 7 – protectionist measures in the world
economy
Alternative 8 - transport costs
13. Theorem of relative factor price
equalization
Paul Samuelson – on of the most versatile economists
of the 20th
century
Basic idea – Samuelson states that the prices of
identical factors of production, such as the wage rate,
or the return to capital, will be equalized across
countries as a result of international trade in
commodities
Caveat – in the real economy we can not await total
factor price equalization (trade unions, minimum
wage, tariffs and other barriers)
14. Stolper-Samuelson theorem
Important expansion of the Heckscher-Ohlin theorem
Basic idea– The theorem states that—under the
assumptions of HOT international trade will lead to a rise
in the return to that factor which is used most intensively in
the production of the goods exported, and conversely, to a
fall in the return to the other factor.
This is a significant departure from the classical theory of
international trade, which claimed that the exchange is
beneficial for everyone
15. Stolper-Samuelson theorem
Has serious real life implications
It explains why some social groups act against the
liberalization of foreign trade and other groups lobby
for it
Ex. trade unions vs. transnational corporations in
developed countries
16. Rybczynsky theorem
1955 – Tadeusz Rybczynsky
Basic idea – At constant relative goods prices, a rise in the endowment
of one factor will lead to a more than proportional expansion of the
output in the sector which uses that factor intensively, and an absolute
decline of the output of the other good.
This has important implications for the quality of the country's
involvement in international trade. This theorem leads us to the
conclusion that countries with low savings will mainly produce and
export labor-intensive goods (and vice versa).
17. Dutch disease and international trade
The term was coined in 1977 by The Economist to
describe the decline of the manufacturing sector in
the Netherlands after the discovery of a large natural
gas field in 1959
Dutch disease is a situation where an increase in
exploitation and utilization of mineral resources in the
economy leads to a decline in production and exports
of other traditional sectors - hence the
deindustrialisation
18. Dutch disease – triggering factors
The sudden discovery of large reserves of natural
resources
A significant increase in world prices of exported raw
materials
Exogenous technological progress in a particular
sector
19. Dutch disease – mechanism
1. Increase in export revenues
2. Conversion of part of the revenue to local currency
3. Appreciation of domestic currency
4. The deterioration of the competitiveness of
traditional export sectors
5. Reduction of production in the traditional export
sectors, the transfer of staff to the highly profitable
sector, possible increase in unemployment
20. Dutch disease – examples
Countries in Sub-Saharan Africa (Nigeria, Sierra
Leone)
Oil exporting countries in general
Positive example - Indonesia
21. Linders theory of overlapping demand
The first hypothesis explaining the existence of intra-
industry trade between countries
Intra-industry trade – is characterized by the similarity of
export and import structure of states
According to Linder the existence of intra-industry
international trade is caused by different consumer
preferences
Basic idea – The more similar the demand structures of
countries, the more they will trade with one another.
22. Linders theory of overlapping demand
Linders interesting conclusion – comparative
advantages in the production of industrial goods are
partly random, but over time they solidify through
economies of scale and through the role of marketing
23. Theories based on products and innovation
Technology gap theory
Posner – differences in technology are important factors in
international trade
Imitation lag– new goods are produced and the innovating
country enjoys a monopoly until the other countries learn to
produce these goods: in the meantime they have to import them
International product life-cycle theory
1966 – Raymond Vernon
3 basic phases – introduction of new product, growth, maturity
(standardization)
24. Theories based on products and innovation
Flying geese paradigm
Kaname Akamatsu
Explains the mechanism of industrial development of
countries and the degree of catching-up process of
industrialization
