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Trade and Resources: The Heckscher-Ohlin Model
God did not bestow all products upon all parts of the earth, but distributed His gifts over different regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so He called commerce into being, that all men might be able to have common enjoyment of the fruits of the earth, no matter where produced.
Libanius (ad 314–393), Orations (III)
Nature, by giving a diversity of geniuses, climates, and soils, to different nations, has secured their mutual intercourse and commerce…. The industry of the nations, from whom they import, receives encouragement: Their own is also [i]ncreased, by the sale of the commodities which they give in exchange.
David Hume, Essays, Moral, Political, and Literary, 1752, Part II, Essay VI, “On the Jealousy of Trade”
Also known as the Heckscher-Ohlin-Samuelson model.
1. Refer to the example in Chapter 2: Canada has natural resources that give it a comparative advantage in snowboards.
2. This chapter develops the Heckscher-Ohlin (HO) model, which explains trade based upon differences in resources between countries. Unlike the Ricardian model, where trade occurs because of differences in technology.
3. HO developed in “golden age” of trade, 1890–1914: Transport costs were falling, so Heckscher and Ohlin focused on factor endowments rather than technology to explain trade.
4. Examples: (1) Canada is land abundant, and so exports agricultural goods and forestry products; (2) U.S., Japan, and European countries have lots of skilled labor, so they export skilled services and manufactured goods
5. Goals of chapter:
a. Develop the model and explain the pattern of trade
b. Look at empirical evidence
c. Explain how trade affects the returns to different factors. Who gains and who loses?
In Chapter 2, we examined U.S. imports of snowboards. We argued there that the resources found in a country would influence its pattern of international trade. Canada’s export of snowboards to the United States reflects its mountains and cold climate, as do the exports of snowboards to the United States from Austria, Spain, Switzerland, Slovenia, Italy, Poland, and France. Because each country’s resources are different and because resources are spread unevenly around the world, countries have a reason to trade the goods made with these resources. This is an old idea, as shown by the quotations at the beginning of this chapter; the first is from the fourth-century Greek scholar Libanius, and the second is from the eighteenth-century philosopher David Hume.
In this chapter, we outline the Heckscher-Ohlin model, a model that assumes that trade occurs because countries have different resources. This model contrasts with the Ricardian model, which assumed that trade occurs because countries use their technological comparative advantage to specialize in the production of different goods. The model is named after the Swedish economists Eli Heckscher, who wrote about his views of international trade in a 1919 article, and his student Bertil Ohlin, who further developed these ideas in his 1924 dissertation.
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The Heckscher-Ohlin model was developed at the end of a “golden age” of international trade (as described in Chapter 1) that lasted from about 1890 until 1914, when World War I started. Those years saw dramatic improvements in transportation: the steamship and the railroad allowed for a great increase in the amount of international trade. For these reasons, there was a considerable increase in the ratio of trade to GDP between 1890 and 1914. It is not surprising, then, that Heckscher and Ohlin would want to explain the large increase in trade that they had witnessed in their own lifetimes. The ability to transport machines across borders meant that they did not look to differences in technologies across countries as the reason for trade, as Ricardo had done. Instead, they assumed that technologies were the same across countries, and they used the uneven distribution of resources across countries to explain trade patterns.
Students struggle with the "realism" of assumptions. "Which is it," they may ask? Is trade due to technological differences, or to factor endowments? Say these are not mutually exclusive, but that each model focuses on one factor affecting trade in order to understand its effects.
Even today, there are many examples of international trade driven by the land, labor, and capital resources found in each country. Canada, for example, has a large amount of land and therefore exports agricultural and forestry products, as well as petroleum; the United States, Western Europe, and Japan have many highly skilled workers and much capital and these countries export sophisticated services and manufactured goods; China and other Asian countries have a large number of workers and moderate but growing amounts of capital and they export less sophisticated manufactured goods; and so on. We study these and other examples of international trade in this chapter.
Emphasize this difference from S-F.
Our first goal is to describe the Heckscher-Ohlin model of trade. The specific-factors model that we studied in the previous chapter was a short-run model because capital and land could not move between the two industries we looked at. In contrast, the Heckscher-Ohlin model is a long-run model because all factors of production can move between industries. It is difficult to deal with three factors of production (labor, capital, and land) in both industries, so, instead, we assume that there are just two factors (labor and capital).
After predicting the long-run pattern of trade between countries using the Heckscher-Ohlin model, our second goal is to examine the empirical evidence on the Heckscher-Ohlin model. Although you might think it is obvious that a country’s exports will be based on the resources the country has in abundance, it turns out that this prediction does not always hold true in practice. To obtain better predictions from the Heckscher-Ohlin model, we extend it in several directions, first by allowing for more than two factors of production and second by allowing countries to differ in their technologies, as in the Ricardian model. Both extensions make the predictions from the Heckscher-Ohlin model match more closely the trade patterns we see in the world economy today.
The third goal of the chapter is to investigate how the opening of trade between the two countries affects the payments to labor and to capital in each of them. We use the Heckscher-Ohlin model to predict which factor(s) gain when international trade begins and which factor(s) lose.