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HO model Flashcards

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1
Q

What are the key criticisms of the Ricardian model?

A

It assumes only one factor of production (labor), constant opportunity costs, and predicts complete specialization, which is unrealistic.

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2
Q

What does the HO model introduce compared to the Ricardian model?

A

It incorporates two factors of production—labor and capital—and explains trade based on differences in factor endowments.

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3
Q

What is the Heckscher-Ohlin (HO) model?

A

A model that predicts trade patterns based on countries exporting goods that use their abundant factors intensively.

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4
Q

Who developed the HO model?

A

Eli Heckscher and Bertil Ohlin; later developed by Paul Samuelson and Ron Jones.

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5
Q

What goods are used in the HO model example?

A

Computers (capital-intensive) and shoes (labor-intensive).

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6
Q

What is the key assumption about mobility in the HO model?

A

Labor and capital move freely between industries within a country but not between countries.

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7
Q

What does it mean to be capital-abundant?

A

A country has a higher capital-to-labor ratio than another country.

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8
Q

What is the Heckscher-Ohlin theorem?

A

Each country exports the good that intensively uses its abundant factor and imports the other good.

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9
Q

What is factor intensity?

A

It describes which factor is used more intensively in production: labor or capital.

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10
Q

What is factor intensity reversal?

A

When a good is capital-intensive in one country and labor-intensive in another, contradicting standard HO assumptions.

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11
Q

What is the shape of the PPF in the HO model?

A

Concave, due to increasing opportunity costs.

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12
Q

How does trade affect the skewness of the PPF?

A

It reflects each country’s production strength: capital-abundant countries skewed toward capital goods.

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13
Q

What determines no-trade relative prices?

A

Factor endowments and intensity in production.

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14
Q

What is the trade triangle?

A

A graphical area showing exports and imports based on differences between production and consumption.

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15
Q

How is the world price determined in the HO model?

A

At the intersection of Home’s export supply and Foreign’s import demand.

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16
Q

What is Leontief’s paradox?

A

The U.S., despite being capital-abundant, exported more labor-intensive goods than it imported in 1947.

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17
Q

How did Leontief test the HO model?

A

By comparing capital/labor ratios of exports and imports of the U.S.

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18
Q

What are explanations for Leontief’s paradox?

A

Ignoring land, tech differences, skilled labor distinction, post-WWII data distortion, lack of full free trade.

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19
Q

What is ‘effective’ labor or capital?

A

The actual amount of a factor adjusted by its productivity.

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20
Q

How do we measure effective factor endowments?

A

Multiply actual factor quantity by productivity and compare with share of world GDP.

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21
Q

What did updated studies using 2013 data find?

A

Productivity adjustments explain HO outcomes better, resolving Leontief’s paradox.

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22
Q

What is the Stolper-Samuelson theorem?

A

An increase in the relative price of a good raises the real income of the abundant factor and lowers that of the scarce factor.

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23
Q

How does trade affect income distribution?

A

It benefits owners of the abundant factor and harms owners of the scarce factor.

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24
Q

What happens to labor’s real wage when computer prices rise?

A

It falls because labor is less intensively used in capital-intensive industries.

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25
What happens to capital’s real return when computer prices rise?
It rises due to higher marginal productivity of capital.
26
What is the key prediction of HO + Stolper-Samuelson?
Opening to trade benefits a country’s abundant factor and hurts its scarce factor.
27
What did data from 1990 show about wages and productivity?
They are highly correlated, confirming productivity's role in income determination.
28
How does freer trade affect skilled vs. unskilled workers?
In skilled-labor-abundant countries, skilled wages rise and unskilled wages fall.
29
Why is the HO model considered a long-run model?
Because it assumes full mobility of factors across industries.
30
How does modern HO modeling differ from early versions?
It includes multiple factors, more countries, and recognizes tech/productivity differences.
31
What are the main assumptions of the HO model?
Two goods, two factors, factor mobility within countries, identical technologies and preferences.
32
What did Rodrik argue in his article on Stolper-Samuelson?
That it holds important implications even when extended to real-world conditions.
33
What was the empirical effect of freer trade on U.S. wage inequality?
It increased the wage gap between skilled and unskilled workers.
34
What does the HO model imply about political economy?
Abundant factor owners support free trade; scarce factor owners oppose it.
35
What is the key reason for trade in the HO model?
Differences in countries’ factor endowments—capital, labor, and land—lead to trade.
36
What are the goals of the Topic 2 lecture?
1) Explain HO model of trade, 2) Examine evidence for HO model, 3) Investigate trade's effect on factor payments.
37
What does the HO model assume about factors of production?
Two factors—labor and capital—which are perfectly mobile between industries but immobile between countries.
38
What does it mean for production to be labor-intensive?
It uses more labor per unit of capital than the other good.
39
Which country is labor-abundant in the HO model example?
Foreign is labor-abundant; Home is capital-abundant.
40
What is the predicted trade pattern in the HO model?
Countries export goods that use their abundant factor intensively and import the other good.
41
What are the six assumptions of the HO model?
1) Two factors, 2) Different factor intensities, 3) Different factor abundances, 4) Free trade in goods, 5) Identical technologies, 6) Identical tastes.
42
Why assume identical tastes across countries?
To isolate resource differences as the sole reason for trade.
43
What causes skewed PPFs in HO model?
Differences in factor endowments—Home PPF skewed to capital-intensive goods, Foreign to labor-intensive goods.
44
What does the autarky equilibrium show in HO?
Relative prices differ due to factor endowments; this creates the basis for trade.
45
What is the Heckscher-Ohlin Theorem?
A country will export the good that uses its abundant factor intensively.
46
What is a trade triangle in the HO diagram?
A graphical triangle representing exports and imports in the consumption-production diagram.
47
What determines world relative price under trade?
The intersection of Home's export supply and Foreign's import demand.
48
Why is complete specialization not observed in HO?
Due to increasing opportunity costs and the need for both factors in both goods.
49
What is factor intensity reversal?
A situation where a good is labor-intensive in one country and capital-intensive in another.
50
Why is factor intensity reversal excluded in basic HO?
To make clear trade predictions.
51
How is a country’s relative abundance of a factor defined?
By comparing its factor ratios (e.g., K/L) to another country.
52
What empirical paradox challenges HO theory?
Leontief’s Paradox.
53
What did Leontief expect in his 1947 test?
U.S. would export capital-intensive goods, being capital-abundant.
54
What did Leontief actually find?
U.S. exports were more labor-intensive than imports.
55
What was the capital-labor ratio for U.S. exports and imports in 1947?
Exports: $14,000/person; Imports: $18,200/person.
56
What is effective labor?
Labor quantity adjusted for productivity, e.g., labor × wage.
57
How did adjusting for effective labor resolve Leontief’s paradox?
The U.S. was abundant in effective (skilled) labor rather than raw labor.
58
What’s the Stolper-Samuelson Theorem?
A rise in a good’s price increases the real return to the factor used intensively in its production.
59
What happens to real wages if a country exports capital-intensive goods?
Real wages fall and real return to capital increases.
60
How does SS theorem affect income distribution?
Trade benefits the abundant factor and harms the scarce one.
61
What does combining HO and SS theorems imply?
Trade raises real income for the abundant factor and lowers it for the scarce factor.
62
What is a “magnification effect”?
The change in factor returns exceeds the change in good prices.
63
What happens to skilled vs unskilled wages after trade liberalization in developed countries?
Skilled wages rise; unskilled wages fall—widening inequality.
64
What was Rodrik’s critique of the SS theorem?
That even with real-world complexities, the core insight about winners/losers from trade holds.
65
Why do PPFs differ between countries in the HO model?
Because countries differ in factor endowments, leading to different opportunity costs.
66
What is the Rybczynski Theorem?
An increase in the endowment of one factor increases the output of the good that uses that factor intensively and decreases the output of the other good.
67
How does the Rybczynski Theorem explain growth effects?
It shows how growth biased toward one factor shifts production toward that factor’s intensive good.
68
Why do factor price equalization (FPE) predictions often fail?
Due to transport costs, barriers to trade, and technology differences.
69
What is the implication of FPE in the HO model?
Trade equalizes factor prices (wages and rentals) across countries under ideal conditions.
70
What are the conditions for FPE to hold?
Identical technologies, same goods produced in both countries, no trade barriers or transport costs.
71
What is the role of the unit-value isoquant in the HO model?
It shows all combinations of capital and labor that can produce one unit of a good at a given cost.
72
How are isoquants used to find factor prices?
By finding tangencies between isoquants and isocost lines, determining cost-minimizing input bundles.
73
What causes the isocost line to rotate?
A change in relative factor prices.
74
How does a fall in the wage-rental ratio affect input use?
Firms use relatively more labor and less capital.
75
What happens to input usage across sectors after trade?
Both industries adjust factor intensities due to changing relative prices.
76
What happens to production points after trade in HO?
Production shifts toward the good that uses the abundant factor intensively.
77
What is meant by an isovalue line?
A line representing combinations of two goods that yield the same revenue.
78
How is trade represented on an isovalue diagram?
As a movement to a higher isovalue line, indicating increased national income.
79
What does a change in relative prices do to isovalue lines?
It changes their slope, indicating a change in the terms of trade.
80
How does trade affect consumption in the HO model?
Consumption can move to a higher indifference curve due to access to more goods.
81
What does a higher indifference curve represent?
A higher level of utility or welfare.
82
What is the economic interpretation of terms of trade improvement?
A country can obtain more imports for the same quantity of exports.
83
What is the long-run impact of trade on wages in labor-abundant countries?
Wages rise in real terms due to increased demand for labor.

Inertnational Economics (6 decks)

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