# ECON 3HH3 Chapter Notes - Chapter 4: Real Wages, Weighted Arithmetic Mean, Factor Endowment

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11 Oct 2017
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The Heckscher-Ohlin (HO) Model
The HO Model
- Long-run model where all factors of production (capital and land) can move freely between industries
Assumptions
1. 2 countries (Home and Foreign), with two goods (computers and shoes), and two factors of production (capital and
land)
a. K = Kc + KS and K* = K*C + K*S
2. Both factors can move freely in both industries
a. The R is equal in both industries
b. The W is equal in both industries
3. Within a country, shoe production is labour-intensive: more labour per unit of capital
Within a country, computer production is capital-intensive: more capital per unit of labour
a. LS/KS > LC/KC and KC/LC > KS/LS
4. Between countries, Foreign is labour-abundant; home is capital-abundant => endowments: how much of a resource
a country owns
a. L*/K* > L/K and K*/L* < K/L
5. Technologies used to produce both goods are identical in both countries
a. Allows us to focus on the different about of factors of productions (labour and capital)
6. Consumers’ taste are the same in both countries and preferences don’t change with income
a. Poorer countries will buy the same amount of shoes as
richer countries
Reversal of Factor Intensities: The idea that at different relative wages, a
country can be more labour-intensive or capital-intensive. We ignore FIRs in
this model .
In L/K comparison, since shoes have a high ratio, it is more right than the curve
for computers; shoes will always be more further right.
Vice versa is true for capital intensive.
HOME an d F O R E I GN c o u n t r i e s at au t a r k y
PPFs and Indifference Curves
- Drawn concave depends on endowment: will have a higher intercept on the good that uses the FoP
o The more FoP allows for greater quantity of that good that is intensive for it, thus higher intercept
- Assume that taste and preferences are the same in both countries, so indifference curve shapes are the same
Slope of indifference curve = relative price of good X in terms of good Y = PX/PY
- Due to different PPFs, they touch at difference points = equilibrium at autarky, thus different slopes
o The no-trade relative price of computers is lower at Home (flat slope) than Foreign (steep slope)
o The no-trade relative price of shoes is higher at Home than at Foreign
- Relative prices are a reflection of a country’s abundance and intensity of FoP
Results
Home: capital abundant, and since
computers is capital intensive, will have a
higher x-intercept than shoes.
Foreign: labour abundant, and since shoes
is labour intensive, will have higher y-
intercept than computers.
A is lower than A* because Home is capital
intensive, it will have a lower relative price
than Foreign.
HOME an d F O R EI G N c o u n t r i e s at f r ee - t r a d e
Equilibrium Point
- With trade, we expect the equilibrium relative price to be between the autarky prices
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