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 ideasComparative cost of the countries depends on

the cost of productionProduction costs depend primarily on the price

of factors of productionThe 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 paradoxIn 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 theoremImportant 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 theorem1955 – 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 – examplesCountries 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