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TRANSCRIPT
doc. Ing. Tomáš Dudáš, PhD.
Structure of the lectureHeckscher-Ohlin theoremLeontief paradoxTheorem of relative factor price equalization Stolper-Samuelson theoremRybczynsky theoremDutch diseaseLinders theory of overlapping demandTheories based on products and innovation
Heckscher-Ohlin theorem - introduction
The main limitation of the classical theories of international trat is that they use only one factor of production – labour
In the real world must take into account the country's factor endowment
This idea was introduced into international economics by two Swedish economists – Eli Heckscher a Bertil Ohlin
Eli Hekscher and Bertil OhlinEli Hekscher (1879-1952)
Was a Swedish political economist and economic historian
Important paper – The Effect of Foreign Trade on the Distribution of Income
Bertil G. Ohlin (1899-1979)Was a Swdish economist and politician – winner of the
Nobel prize for economics in 1977Interregional and International Trade
Theoretical assumptions – identical with classical theories
• 2*2 model (2 countries – 2 goods)• Homogeneous goods• Labor is homogeneous within a country but heterogeneous across
countries. • Complete mobility of labor in the country and complete immobility of
labor across the country• No transportation costs• Full employment• Production technology differences exist across industries and across
countries and are reflected in labor productivity parameters. • The labor and goods markets are assumed to be perfectly competitive
in both countries. • Firms are assumed to maximize profit while consumers (workers) are
assumed to maximize utility.
Theoretical assumptions – new assumptions
There are two factors of production – labour and capital
Both countries have identical production technology
The technologies used to produce the two commodities differ
Different factor endowment in the model countries
Identical consumer preferences
Heckscher-Ohlin theorem – basic ideas
Comparative cost of the countries depends on the cost of production
Production costs depend primarily on the price of factors of production
The law of supply and demand stipulates that the production factor that is abundant in the country, will be a relatively inexpensive (and vice versa)
Production costs will therefore be low if it uses the cheaper factor of production – the abundant production factor.
Heckscher-Ohlin theorem – basic ideas
A country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively.
A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive goods
HOT is also very often called as the factor endowment theory
Heckscher-Ohlin theorem – example
Ireland and Swaziland – factor endowment
To calculate relative factor endowment we use the capital/labour ratio K/L
Ireland: 124 bln./3,1 mil. = 40 000 USDSwaziland: 5,6 bln./0,8 mil. = 7 000 USD
Labour force Capital
Ireland 3.1 millions 124 bln. USD
Swaziland 0.8 millions 5.6 bln. USD
Leontief paradox
In the period around World War II the HOT was considered as the indisputable model of international trade
But in 1953, Wassily Leontief shocked the scientific community when he found that the United States—the most capital-abundant country in the world—exported labor-intensive commodities and imported capital-intensive commodities, in contradiction with Heckscher–Ohlin theory
Leontieff was one of the world's most respected economists of his age
Leontief paradox – possible explanations
Leontief – the paradox is caused by the higher labour productivity in the USA
Alternative 1 – Problems in the methodologyWrong basis year for the analysisNo real statistics for factor endowmentLeontief omitted the import of the products not
produced in the USAUsage of incorrect variables
Leontief paradox – possible explanation
Alternative 2 – questions of human capitalAlternative 3 – introducing natural resourcesAlternative 4 – the basic assumption of HOT about
same consumer preferences is not validAlternative 5 – preference of domestic productsAlternative 6 – differences in technologiesAlternative 7 – protectionist measures in the world
economyAlternative 8 - transport costs
Theorem of relative factor price equalization
Paul Samuelson – on of the most versatile economists of the 20th century
Basic idea – Samuelson states that the prices of identical factors of production, such as the wage rate, or the return to capital, will be equalized across countries as a result of international trade in commodities
Caveat – in the real economy we can not await total factor price equalization (trade unions, minimum wage, tariffs and other barriers)
Stolper-Samuelson theorem
Important expansion of the Heckscher-Ohlin theorem
Basic idea– The theorem states that—under the assumptions of HOT international trade will lead to a rise in the return to that factor which is used most intensively in the production of the goods exported, and conversely, to a fall in the return to the other factor.
This is a significant departure from the classical theory of international trade, which claimed that the exchange is beneficial for everyone
Stolper-Samuelson theorem
Has serious real life implications
It explains why some social groups act against the liberalization of foreign trade and other groups lobby for it
Ex. trade unions vs. transnational corporations in developed countries
Rybczynsky theorem 1955 – Tadeusz Rybczynsky
Basic idea – At constant relative goods prices, a rise in the endowment of one factor will lead to a more than proportional expansion of the output in the sector which uses that factor intensively, and an absolute decline of the output of the other good.
This has important implications for the quality of the country's involvement in international trade. This theorem leads us to the conclusion that countries with low savings will mainly produce and export labor-intensive goods (and vice versa).
Dutch disease and international trade
The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959
Dutch disease is a situation where an increase in exploitation and utilization of mineral resources in the economy leads to a decline in production and exports of other traditional sectors - hence the deindustrialisation
Dutch disease – triggering factors
The sudden discovery of large reserves of natural resources
A significant increase in world prices of exported raw materials
Exogenous technological progress in a particular sector
Dutch disease – mechanism
1. Increase in export revenues2. Conversion of part of the revenue to local currency3. Appreciation of domestic currency4. The deterioration of the competitiveness of
traditional export sectors5. Reduction of production in the traditional export
sectors, the transfer of staff to the highly profitable sector, possible increase in unemployment
Dutch disease – examples
Countries in Sub-Saharan Africa (Nigeria, Sierra Leone)
Oil exporting countries in general
Positive example - Indonesia
Linders theory of overlapping demand
The first hypothesis explaining the existence of intra-industry trade between countries
Intra-industry trade – is characterized by the similarity of export and import structure of states
According to Linder the existence of intra-industry international trade is caused by different consumer preferences
Basic idea – The more similar the demand structures of countries, the more they will trade with one another.
Linders theory of overlapping demand
Linders interesting conclusion – comparative advantages in the production of industrial goods are partly random, but over time they solidify through economies of scale and through the role of marketing
Theories based on products and innovation
Technology gap theoryPosner – differences in technology are important factors in
international trade Imitation lag– new goods are produced and the innovating
country enjoys a monopoly until the other countries learn to produce these goods: in the meantime they have to import them
International product life-cycle theory1966 – Raymond Vernon
3 basic phases – introduction of new product, growth, maturity (standardization)
Theories based on products and innovation
Flying geese paradigmKaname AkamatsuExplains the mechanism of industrial development of
countries and the degree of catching-up process of industrialization