EC4371 Chapter 4

Question 1

What is the Heckscher-Ohlin theorem?

Answer 1

A country will export the good whose production intensively uses the country’s relatively abundant factor

Question 2

What is the source of comparative advantage in the HO model?

Answer 2

Relative supplies of factors between countries

Recall: in the Ricardian, it is due to differences in relative labour productivities

Question 3

Discuss McGilray and Anderson’s test of the Heckscher-Ohlin model.

Answer 3

Based on HO theorem: countries export products which are intensive in its relatively abundant factor.

A country that is abundant in labour should export labour intensive products

Data

Trade flows between UK and Ireland–data readily available because

Ireland's primary trading partner is the UK
 Irish economy is trade-dependent
 Irish economy has large primary commodity content

Hypothesis

Ireland should export labour-intensive products

Methodology

Compared capital-labour ratios for exports and competing imports

Specification checks

Total merchandise trade / total merchandise trade with UK/ total trade / total trade with UK

Direct / total inputs

Result

Mostly confirmed hypothesis. Imports are relatively more capital-intensive, while exports are relatively more labour-intensive. Holds for first set of specification checks.

HOWEVER this observation disappears when second specification check was performed. After excluding natural resources (total –> direct inputs), no difference in factor composition of imports and exports.

Why not? Large Irish export share comes from food-processing industry, which indirectly exports products of labour-intensive sector (i.e. hidden labour-intensive exports).

Question 4

Discuss Leontief’s test of the HOS model. What is the Leontief paradox?

Answer 4

Leontief paradox:

In 1954, Leontief found that the U.S. exported labor-intensive commodities and imported capital-intensive commodities

Contrary to predictions of H-O model–U.S. is capital-intensive, and should export capital-intensive goods

Methodology

1. Leontief used 1947 input-output table of the US economy
2. Inputs were divided into two categories–labour and capital
3. Outputs were broken down into 50 different categories.
4. Leontief estimated the capital and labour requirements for a fixed bundle of output (including both direct and indirect inputs). This was used to compute the capital-labour ratio
5. All information was then compiled into a table which showed whether products traded were more capital or labour intensive.

Result

Expectation: average bundle of US exports should be capital-intensive

Finding: an average bundle of US exports (worth $1 million) contained less capital and more labour than expected

CONTRADICTS HOS PREDICTION

Question 5

What are some possible reasons for the Leontief paradox?

Answer 5

1. Labour productivity–US might be considered labour abundant if labour productivity is high
2. Endowment of natural resources used in production
3. Factor intensity reversal: factor intensity changes when factor prices change (i.e. firms can substitute one factor for another)
4. Demand bias toward capital-intensive goods leads US to have to import capital-intensive goods
5. Human capital–but hard to account for
6. Trade surplus–US did not have a trade balance, which might explain occurence of paradox

Question 6

Discuss McGilray and Anderson’s resolution of the Leontief paradox.

Answer 6

Vanek (1963):
Natural resource products are capital-intensive

Compared to equivalent value of exports, US imports had a high natural resource content

Hence average bundle of US exports seem to be relatively labour-intensive rather than capital-intensive

When natural resource sectors were excluded, the Leontief paradox disappeared.

Question 7

Compare the HOS model to the Ricardian model.

Answer 7

Question 8

What is the Rybczynski theorem?

Answer 8

Assume relative commodity prices are constant, and both goods are produced.

Increasing the supply of one factor will lead to

1. an increase in the production of the good which uses the factor intensively
2. a decrease in the production of the other good

Question 9

What is the Stolper-Samuelson theorem?

Answer 9

Assume CRS and both commodities are in production.

A relative increase in the price of one commodity will

1. Increase real returns to the factor used intensively in its production
2. Decrease real returns to the non-intensively used factor

Question 10

What is the factor price equalisation theorem?

Answer 10

Trade will cause absolute and relative factor prices to equalise across countries.