ECON 101 Lecture Notes - Lecture 5: Comparative Advantage
Lecture 05 - Mobile Factors and Endowment Differences
• No matter what, if you’re in the abundant factor industry, you’ll be for trade, and if
you’re in the scare factor industry, you’ll be against trade
• The Heckscher-Ohlin Trade Model
o Resources CAN move costlessly across industries
o Industries differ in the intensities of factor use (one uses labor more intensely, the
other uses land more intensely)
o Countries differ in the endowments of factors
o Comparative advantage derives from relative factor abundance (in countries),
combined with relative factor intensities (in production)
o Basic Ingredients (assumptions):
▪ Number of factors of production: 2 (labor L and land T)
▪ Mobility of factors of production: both factors are mobile
▪ Number of industries (goods): 2
• Computers QC from T and L; Food QF from T and L
▪ Perfect Competition, transport costs: 0
▪ Key Force: Differences in factor intensities AND endowments
• Marginal Products and Factor Allocation
o How much land and labor will be employed in each sector?
▪ Both land and labor are mobile across sectors
▪ So, wages and rental rates are equal in both sectors in equilibrium by the
input rules
o
and
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o The wage in this world has to be equal to the intersection of the VMP lines of the
two industries
o Remember that wage w is the cost for L and rental price r is the cost for T
• Factor Intensities
o Computer production is relatively labor-intensive
o Food production is relatively land-intensive
o In a world with two goods (computers and food) and two factors (labor and land),
food production is relatively land-intensive if, at any given wage-rental ratio
,
▪ The land-labor ratio in food production is greater than in computer
production
▪ In essence, we’re saying one industry uses more T with respect to L
against the other industry
o To compare two countries’ labor or land endowments, we would compare the
ratio between the two. In short, Home is relatively land endowed if:
▪
• Factor Intensities and Factor Prices
o A country’s demand for the factors depend on how expensive they are with
relation to each other
o If the wage-rental ratio
, then labor is more expensive than land. If
,
then labor is cheaper than land
o If we’re graphing
vs.
, we need to analyze these two for the two industries
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