Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model)

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Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model). The Explanation of International Trade: Differences across countries in relative abundance of factors of production. Assumptions: Identical Technologies Identical Demand Patterns. Factor Intensity.
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Relative Supply of Factors of Production and International Trade (Heckscher-Ohlin Model)The Explanation of International Trade: Differences across countries inrelative abundance of factors of production.Assumptions: Identical Technologies Identical Demand PatternsFactorIntensity:Full employmentYK constantABB’L constantCDXStructural Bias: The Transformation Curve( = ABC) shifts asymmetrically with unbalanced changes in K and L. A Rise in K, with no change in L, leads to an increase(fall) in X (Y)).AT POINT C1) Labor is unemployed: W=0.(2) X-industry is active Y-industry is inactive. Therefore:AT POINT A1) Capital is unemployed: R=0.(2) Y-industry is active X-industry is inactive. Therefore:AT Point A(continue):At Point BRelative SupplyThe Bias in Relative SupplyTwo Countries: H and F (H is more capital abundant)Free Trade and Autarkic Equilibria3212=Free trade1=autarky in H3=autarky in FFull Employment Supply of X and Y:Heckscher-Ohlin Proposition #1: The country exports the good which is intensive in the use of the factor with relative abundance.Full Employment Factor Prices:Income Distribution and International TradeWAIndustry X-LineBB’Industry Y-LineCDRABC=factor price frontierA rise in(X is capital intensive) will raise R and decrease W.Heckscher-Ohlin Proposition #2(dual to Proposition #1): Free trade causes an increase in the factor price of the factor of production which is used intensively in the export industry and a fall in the factor price used intensively in the import competing industry.
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