The Heckscher-Ohlin and Other trade theories (Salvatore)

Question 1

What does the Heckscher-Ohlin theory focus on?

Answer 1

The difference in the relative abundance of factors of production in various nations as the most important determinant of the difference in relative commodity prices and comparative advantage.

Question 2

2 Theorems the H-O model focuses on:

Answer 2

• H-O Theorem (which deals with and predicts the pattern of trade)
• Factor-price equalization theorem (which deals with the effect of international trade on factor prices)

Question 3

The H-O theorem:

Answer 3

A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.

Question 4

Factor-price equalization theorem

Answer 4

International trade will bring about equalisation in the returns to homogeneous or identical factors across nations

Question 5

Explain the equalisation theorem (why)

Answer 5

• In the absence of trade the relative price of commodity X is lower in Nation 1 because the relative price of labour (wage rate) is lower in Nation 1
• As nation 1 specialises in X and reduces its production of Y, the relative demand for labour rises, causing wages to rise, while the demand for capital falls causing the interest rate to fall (and the opposite for Nation 2)
• Thus international trade causes the wage rate to rise in Nation 1 and to fall in Nation 2 and reduces the pretrade difference in wages between nations. (Same with interest rate)
• As long as wages and interest rates differ, trade continues to expand, but its expansion reduces the differences in wage and interest rates.
• International trade continues to expand until wages and interest rates are completely equalised between the 2 nations.

Question 6

The Stolper-Samuelson theorem

Answer 6

Free international trade reduces the real income of the nation’s relatively scarce factor and increases the real income of the nation’s relatively abundant factor.

Question 7

With international trade causing real wages and the real income of labor to fall in a labor-scarce and capital-abundant nation, shouldn’t the government restrict trade?

Answer 7

No, the loss that trade causes to labour is less than the gain received by owners of capital (so they tax owners of capital and subsidise labour)

Question 8

The specific-factors model (when eg some type of capital could be used only or was specific to the production of some good and another type of capital specific to another good)

Answer 8

The opening of trade leads to

• An increase in the return or earnings of capital specific to the nation’s export commodity
• A reduction in the return of capital specific to the nation’s import-competing industry
• Ambiguous results (to increase or decrease) in the return or earnings of labour (the mobile factor)

Question 9

Leontief paradox

Answer 9

The empirical finding that the US import substitutes were more K intensive than US exports. This is contrary to the H-O model which predicts that, as the most K-abundant nations, the US should import L-intensive products and export K-intensive products.

Question 10

Increasing returns to scale

Answer 10

The production situation where output grows proportionately more than the increase in inputs or factors of production

Question 11

International economies of scale

Answer 11

The increased productivity resulting from the firm’s integration of its entire system of manufacturing operations around the world.

Question 12

The hypothesis advanced by Linder

Answer 12

A nation exports those manufactured products for which a large domestic market exists, that appeal to the majority of the population and import those products that appeal to the low- and high-income minorities.
Trade in manufactures is likely to be largest among countries with similar interests and income levels.

Question 13

Intra-industry trade

Answer 13

International trade in the differentiated products of the same industry or broad product group

Question 14

Technological gap model

Answer 14

The hypothesis that a portion of international trade is based on the introduction of new products or processes

Question 15

Product cycle model

Answer 15

The hypothesis, advanced by Vernon, that new products introduced by industrial nations and produced with skilled labour eventually become standardized and can be produced in other nations with less skilled labour.

Question 16

According to the product cycle model, a product goes through 5 stages:

Answer 16

1. Introduction
2. Expansion of production for export
3. Standardization and beginning of production abroad through imitation
4. Foreign imitators underselling the nation in third markets
5. Foreigners underselling the innovating firms in their home markets as well.

Question 17

Why are high-income and labour-saving products most likely to be introduced in rich nations?

Answer 17

• The opportunities for doing so are greatest there.
• The development of these new products requires proximity to markets so as to benefit from consumer feedback in modifying the product
• there is a need to provide service

Question 18

Environmental standards

Answer 18

The level of pollution accepted in various countries