Transcript The HOV Model

Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Lecture 1b. Classic and Neoclassic
Trade Models:
Heckscher-Ohlin Model
Carlos Llano
References:
Feentra y Taylor (2011). International Economics. Worth Publishers. Chapter 4.
Krugman P. Obsfeld and Melitz: International Economics. Prentice Hall, 2012. Chapter .
van Marrewijk C. (2009): The New Introduction to Geographical Economics. Cambridge
University Press.
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Introduction
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
In this chapter, we outline the Heckscher-Ohlin
model, a model that assumes that trade occurs
because countries have different resources.’
Our first goal is to describe the Heckscher-Ohlin (HO)
model of trade.
• The specific-factors model (Chapter 3) was a
short-run model because capital and land could
not move between the industries.
• In contrast, the HO model is a long-run model
because all factors of production can move
between the industries.
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Introduction
Our second goal is to examine the empirical evidence
on the Heckscher-Ohlin model.
• By allowing for more than two factors of
production and also allowing countries to differ in
their technologies, as in the Ricardian model, the
predictions from the Heckscher-Ohlin model
match more closely the trade patterns 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.
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1 Heckscher-Ohlin Model
Assumptions of the Heckscher-Ohlin Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Assumption 1: Two factors of production, labor and
capital, can move freely between the industries.
Assumption 2:
• Two products: shoes vs computers;
• Shoes production is labor-intensive; that is, it requires
more labor per unit of capital to produce shoes than
computers, so that LS /KS > LC /KC.
• Computers are capital-intensive: KS / LS > KC / LC
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
1 Heckscher-Ohlin Model
Labor Intensity of Each Industry The demand for labor relative to
capital is assumed to be higher in shoes than in computers,
LS/KS > LC/KC.
These two curves slope down just like regular demand curves,
but in this case, they are relative demand curves for labor (i.e.,
demand for labor divided by demand for capital).
FIGURE 4-1
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1 Heckscher-Ohlin Model
Assumptions of the Heckscher-Ohlin Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Assumption 3: Foreign is labor-abundant, by which we
mean that the labor–capital ratio in Foreign exceeds that
in Home, L*/K*> L/K. Equivalently, Home is capitalabundant, so that K/L >K*/L*.
Assumption 4: The final outputs, shoes and computers,
can be traded freely (i.e., without any restrictions)
between nations, but labor and capital do not move
between countries.
Assumption 5: The technologies used to produce the
two goods are identical across the countries.
Assumption 6: Consumer tastes are the same across
countries, and preferences for computers and shoes do
not vary with a country’s level of income.
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1 Heckscher-Ohlin Model
No-Trade Equilibrium
Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-2 (1 of 3)
No-Trade Equilibria in Home and Foreign
The Home production possibilities
frontier (PPF) is shown in panel (a),
and the Foreign PPF is shown in
panel (b).
Because Home is capital
abundant and computers are
capital intensive, the Home
PPF is skewed toward
computers.
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Why are Production Possibilities Frontiers
skewed?
Home is capital-abundant and computer producing is capitalintensive .
 Home is capable to produce more computers than shoes.
 Production possibility frontier is skewed in the direction of
computers.
Foreign is labor-abundant and shoes producing is labor-intensive.
 Production possibility frontier is skewed in the direction of shoes.
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1 Heckscher-Ohlin Model
No-Trade Equilibrium
Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-2 (2 of 3)
No-Trade Equilibria in Home and Foreign (continued)
Home preferences are summarized
by the indifference curve, U.
The Home no-trade (or autarky)
equilibrium is at point A.
The flat slope indicates a low
relative price of computers, (PC
/PS)A.
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Heckscher-Ohlin Model
• Indifference curves are the same shape in both countries as
required by assumption 6.
• The slope of an indifference curve equals the amount that
consumers are willing to pay for computers in terms of shoes
given up.
• In the equilibrium, the slope of an indifference curve equals the
slope of a production possibility frontier.
• A steeply sloped price line implies a high relative price of
computers whereas a flat price line implies low relative price of
computers.
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1 Heckscher-Ohlin Model
No-Trade Equilibrium
Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-2 (3 of 3)
No-Trade Equilibria in Home and Foreign (continued)
Foreign is labor-abundant and shoes are Foreign preferences are summarized by
the indifference curve, U*
labor- intensive, so the Foreign PPF is
The Foreign no-trade equilibrium is at
skewed toward shoes.
point A*, with a higher relative price of
computers, as indicated by the steeper
slope of (P*C /P*S)A*.
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Heckscher-Ohlin Model
• We expect the equilibrium relative price of computers to lie
between the no-trade relative prices in each country
• This implies, hence, that Home will be exporting computers and
Foreign will be exporting shoes
• Importantly, in contrast to Ricardian model Home and Foreign
are not completely specialized to produce only a single product.
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Home Equilibrium with Free Trade
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-3 (1 of 2)
International Free-Trade Equilibrium at Home
At the free-trade world relative price of
computers, (PC /PS)W,
Home produces at point B in panel (a) and
consumes at point C,
exporting computers and importing shoes.
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Point A is the no-trade equilibrium.
The “trade triangle” has a base equal to
the Home exports of computers (the
difference between the amount produced
and the amount consumed with trade,
(QC2 − QC3).
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Home Equilibrium with Free Trade
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-3 (2 of 2)
International Free-Trade Equilibrium at Home (continued)
The height of this triangle is the Home
imports of shoes (the difference between
the amount consumed of shoes and the
amount produced with trade, QS3 − QS2).
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In panel (b), we show Home
exports of computers equal to zero
at the no-trade relative price, (PC
/PS)A,
and equal to (QC2 − QC3) at the
free-trade relative price, (PC/PS)W.
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Foreign Equilibrium with Free Trade
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-4 (1 of 2)
International Free-Trade Equilibrium in Foreign
At the free-trade world relative price of
computers, (PC /PS)W,
Foreign produces at point B* in panel (a) and
consumes at point C*,
importing computers and exporting shoes.
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Point A* is the no-trade equilibrium.)
The “trade triangle” has a base equal to
Foreign imports of computers (the
difference between the consumption of
computers and the amount produced with
trade, (Q*C3 − Q*C2).
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Foreign Equilibrium with Free Trade
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-4 (2 of 2)
International Free-Trade Equilibrium in Foreign (continued)
The height of this triangle is Foreign
exports of shoes (the difference
between the production of shoes and
the amount consumed with trade, Q*S2
– Q*S3).
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In panel (b), we show Foreign imports
of computers equal to zero at the notrade relative price, (P*C /P*S)A*, and
equal to (Q*C3 − Q*C2) at the freetrade relative price, (PC /PS)W.
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1 Heckscher-Ohlin Model
Free-Trade Equilibrium
Equilibrium Price with Free Trade Because exports equal imports,
there is no reason for the relative price to change and so this is a freetrade equilibrium.
FIGURE 4-5
Determination of the Free-Trade World Equilibrium Price
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
The world relative price of
computers in the free-trade
equilibrium is determined at the
intersection of the Home export
supply and Foreign import
demand, at point D.
At this relative price, the
quantity of computers that
Home wants to export, (QC2 −
QC3), just equals the quantity of
computers that Foreign wants to
import, (Q*C3 − Q*C2).
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1 Heckscher-Ohlin Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Free-Trade Equilibrium
Pattern of Trade
• Home exports computers, the good that uses
intensively the factor of production (capital) found
in abundance at Home.
• Foreign exports shoes, the good that uses
intensively the factor of production (labor) found in
abundance there.
• This important result is called the HeckscherOhlin theorem.
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3 Effects of Trade on Factor Prices
Effect of Trade on the Wage and Rental of Home
Economy-Wide Relative Demand for Labor
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-10
Relative
supply
Determination of Home Wage/Rental
Relative
demand
The economy-wide relative
demand for labor, RD, is an
average of the LC /KC and LS /KS
curves and lies between these
curves.
The relative supply, L/K, is
shown by a vertical line because
the total amount of resources in
Home is fixed.
The equilibrium point A, at which
relative demand RD intersects
relative supply L/K, determines
the wage relative to the rental,
W/R.
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3 Effects of Trade on Factor Prices
Effect of Trade on the Wage and Rental of Home
Increase in the Relative Price of Computers
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-11
Increase in the Price of Computers
Initially, Home is at a no-trade
equilibrium at point A with a
relative price of computers of
(PC /PS)A.
An increase in the relative
price of computers to the
world price, as illustrated by
the steeper world price line,
(PC /PS)W, shifts production
from point A to B.
At point B, there is a higher
output of computers and a
lower output of shoes,
QC2 > QC1 and QS2 < QS1.
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3 Effects of Trade on Factor Prices
Effect of Trade on the Wage and Rental of Home
Increase in the Relative Price of Computers
FIGURE 4-12 (1 of 2)
Effect of a Higher Relative Price of Computers on Wage/Rental
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
An increase in the
relative price of
computers shifts the
economy-wide relative
demand for labor, RD1,
toward the relative
demand for labor in the
computer industry, LC
/KC.
The new relative demand
curve, RD2, intersects
the relative supply curve
for labor at a lower
relative wage, (W/R)2.
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3 Effects of Trade on Factor Prices
Effect of Trade on the Wage and Rental of Home
Increase in the Relative Price of Computers
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4-12 (2 of 2)
Effect of a Higher Relative Price of Computers on Wage/Rental
(continued)
As a result, the wage
relative to the rental falls
from (W/R)1 to (W/R)2.
The lower relative wage
causes both industries to
increase their labor–
capital ratios, as
illustrated by the
increase in both LC /KC
and LS /KS at the new
relative wage.
↑
Relative supply
No change
↓
↑
↓
Relative demand
No change in total
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
3 Effects of Trade on Factor Prices
Determination of the Real Wage and Real Rental
Change in the Real Rental
R = PC • MPKC
R = PS • MPKS
MPKC = R/PC ↑
MPKS = R/PS ↑
Change in the Real Wage
W = PC • MPLC
W = PS • MPLS
MPLC = W/PC ↓
MPLS = W/PS ↓
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
3 Effects of Trade on Factor Prices
Determination of the Real Wage and Real Rental
• Stolper-Samuelson Theorem: In the long run, when
all factors are mobile, an increase in the relative price
of a good will increase the real earnings of the factor
used intensively in the production of that good and
decrease the real earnings of the other factor.
• For our example, the Stolper-Samuelson theorem
predicts that when Home opens to trade and faces a
higher relative price of computers, the real rental on
capital in Home rises and the real wage in Home falls.
In Foreign, the changes in real factor prices are just
the reverse.
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3 Effects of Trade on Factor Prices
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Changes in the Real Wage and Rental: A Numerical Example
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3 Effects of Trade on Factor Prices
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Changes in the Real Wage and Rental: A Numerical Example
General Equation for the Long-Run Change in Factor Prices The
long-run results of a change in factor prices can be summarized in
the following equation:
Real
wage
falls
Real rental
increases
The equations relating the changes in product prices to changes in
factor prices are sometimes called the “magnification effect” because
they show how changes in the prices of goods have magnified effects
on the earnings of factors:
Real
rental
falls
Real
wage
increases
Real
rental
falls
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Real
wage
increases
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K
A PePyE NTDeI Xr m
TO
CHAPTER 4
The Sign Test in the Heckscher-Ohlin Model
Measuring the Factor Content of Trade
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4A-1
Factor Content of Trade for the United States, 1947 This table extends Leontief’s
test of the Heckscher-Ohlin model to measure the factor content of net exports.
The first column for exports and for imports shows the amount of capital or labor
needed per $1 million worth of exports from or imports into the United States, for
1947. The second column for each shows the amount of capital or labor needed
for the total exports from or imports into the United States. The final column is
the difference between the totals for exports and imports.
By taking the difference between the factor content of exports and the
factor content of imports, we obtain the factor content of net exports, shown
in the final column of Table 4A-1.
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Computer Lab
Ricardian Model:
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
• A Practical Guide to Trade Policy Analysis:
• http://vi.unctad.org/tpa/
• www.uam.es/carlos.llano//master_ec_intern/1_Lab_Ricardo.zip
Testing the HOV Model:
• Feenstra, R. 2004. Chapter 2
• www.uam.es/carlos.llano//master_ec_intern/Chapter_2.zip
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A PePyE NTDeI Xr m
TO
K
CHAPTER 4
The Sign Test in the Heckscher-Ohlin Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
The Sign Test
We make use of the factor content of trade in developing a
test for the Heckscher-Ohlin model, called the sign test.
This test states that if a country is abundant in an effective
factor, then that factor’s content in net exports should be
positive, but if a country is scarce in an effective factor,
then that factor’s content in net exports should be negative.
Sign of (country’s % share of effective factor − % share of world GDP)
= Sign of country’s factor content of net exports
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
1 Heckscher-Ohlin Model
Heckscher-Ohlin Theorem:
Assumption 1: Labor and capital flow freely between the
industries.
Assumption 2: The production of shoes is labor-intensive
as compared with computer production, which is capitalintensive.
Assumption 3: The amounts of labor and capital found in
the two countries differ, with Foreign abundant in labor and
Home abundant in capital.
Assumption 4: There is free international trade in goods.
Assumption 5: The technologies for producing shoes and
computers are the same across countries.
Assumption 6: Tastes are the same across countries.
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3. Testing the Heckscher-Ohlin-Vanek (HOV)
• HOV: Many countries, i = 1,…,C; Industries, j=1,…,N; Factors, k =1,..,M.
• Technologies are identical across countries.
• Tastes are identical and homothetic across countries.
• Matrix A=[ajk]' , with dimensions (MxN), denotes the amounts of labor, capital,
land,…needed for one unit of production in each industry.
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
• Notice that this matrix applies in any country (same technology in all C).
• Rows measure factors (k=1,…,M);
• Columns measure industries (j=1,…,N).
• Yi denotes the (Nx1) vector of outputs in each industry for country i,
• Di denote the (Nx1) vector of demands of each good (equal for all countries)
• Thus, Ti =Yi– Di equals the vector of net exports for country i.
• The factor content of trade is: Fi ≡ ATi, which is an (Mx1) vector.
• We denote individual components of this vector as Fik where:
• A positive value indicates that the factor is exported,
• A negative value indicates that the factor is imported.
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3. Testing the HOV Model
• HOVM relates the factor content of trade ATi to the endowments of country i.
• To do so, we compute AYi and ADi.
• AYi
=
demand for factors in country i. It is also, the endowments of country i,
• AYi = Vi
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
• ADi is simplified by using our assumption of identical and homothetic tastes.
• Since product prices are equalized across countries by free trade, the
consumption vectors of all countries must be proportional to each other.
• Thus Di = si Dw,
• where Dw = the world consumption vector
• si = the share of country i in world consumption.
• Thus: ADi= siADw.
• If trade is balanced, si = country i’s share of world GDP.
• Since world consumption must equal world production, then:
ADi= si ADw = siAYw = siVw.
HOV Theorem: Fi ≡ ATi = Vi– si Vw
HOV Theorem (for individual factors): Fik = Vik– si Vwk
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3. Testing the HOV Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Fi ≡ ATi = Vi– si Vw
T i = A-1(V i – s i V w)
Partial
tests
Complete
test
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3. Testing the HOV Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
The first test was performed by Leontief (1953).
• He supposed that USA was abundant in capital relative to the
rest of the world.
• Thus, from the H-O theorem, US was expected to export
capital-intensive goods and import labor-intensive ones.
• He found the opposite: the capital–labor ratio for U.S. imports
was higher than the one for U.S. exports!
• This contradiction of the H-O is the Leontief’s paradox.
<
Each column shows the amount of capital or labor needed to produce $1
million worth of exports from, or imports into, the United States in 1947.
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3. Testing the HOV Model
Leontief’s Paradox
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Explanations
• U.S. and foreign technologies are not the same, in
contrast to what the HO theorem and Leontief assumed.
• By focusing only on labor and capital, Leontief ignored
land abundance in the United States.
• Leontief should have distinguished between skilled and
unskilled labor (because it would not be surprising to
find that U.S. exports are intensive in skilled labor).
• The data for 1947 may be unusual because World War
II had ended just two years earlier.
• The United States was not engaged in completely free
trade, as the Heckscher-Ohlin theorem assumes.
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3. Testing the HOV Model
Factor Endowments in the New Millennium
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
• To determine whether a country is abundant in a certain
factor, we compare the country’s share of that factor
with its share of world GDP.
• If its share of a factor exceeds its share of world GDP, then we
conclude that the country is abundant in that factor, and
• if its share in a certain factor is less than its share of world GDP, then
we conclude that the country is scarce in that factor.
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3. Testing the HOV Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Country Factor Endowments, 2000. Feenstra and Taylor (2011)
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3. Testing the HOV Model
Feenstra and Taylor (2011)
Differing Productivities across Countries
• Leontief found that the US was exporting labor-intensive
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
products even though it was capital-abundant.
• Why?
• Labor is more productive in the US than in the rest of the world.
• Then, the effective labor force in the US, the labor force times its
productivity, is larger than it appears to be when we just count people.
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3. Testing the HOV Model
Feenstra and Taylor (2011)
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Differing Productivities across Countries
To allow factors of production to differ in their productivities
across countries, we define the effective factor
endowment as the actual amount of a factor found in a
country times its productivity:
Effective factor endowment = Actual factor endowment *
Factor productivity
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3. Testing the HOV Model
Feenstra and Taylor (2011)
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Differing Productivities across Countries
• To determine whether a country is abundant in a certain
factor, we compare the country’s share of that effective
factor with its share of world GDP.
• If its share of an effective factor exceeds its share of
world GDP, then we conclude that the country is
abundant in that effective factor;
• if its share of an effective factor is less than its share
of world GDP, then we conclude that the country is
scarce in that effective factor.
Effective R&D Scientists
Effective R&D scientists =
Actual R&D scientists • R&D spending per scientist
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3. Testing the HOV Model
Feenstra and Taylor (2011)
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Differing Productivities across Countries. 2000
•
•
China: abundant in R&D scientists (14% > 11% of the world’s GDP) but scarce in effective
R&D scientists (7% < 11% of the world’s GDP).
US: scarce in arable land (13% < 22% of the world’s GDP) but neither scarce nor
abundant in effective land (21% = 22% ).
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3. Testing the HOV Model
Feenstra and Taylor (2011)
Leontief’s Paradox Once Again
Labor Abundance
FIGURE 4-8
Labor Endowment and GDP for the United States and Rest of World, 1947
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Shown here are the share of
labor, “effective” labor, and GDP
of the US and the rest of the
world in 1947. The US had only
8% of the world’s population, as
compared to 37% of the world’s
GDP, so it was very scarce in
labor. But when we measure
effective labor by the total
wages paid in each country,
then the United States had 43%
of the world’s effective labor as
compared to 37% of GDP, so it
was abundant in effective labor.
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3. Testing the HOV Model. Feenstra (2004).
A complete test for HOV
Fi
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Factor content
of net exports
data
≡
ATi
=
A=technology
data in country i
Vi– si Vw
T i = A-1(V i – s i V w)
Factor Endowment data in
country I and in the World
1. The sign test
sign(Fik ) = sign ( Vik– si Vwk)
2. The rank test

 

Fki  Fl i  Vki  s iVkw  Vl i  s iVl w , i = 1,..., C ; k , l = 1,..., M
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3. Testing the HOV Model
1. The sign test
sign(Fik ) = sign ( Vik– si Vwk)
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Factor content of net exports data
Factor Endowment data
Sign of (country’s % share of factor − % share of world GDP)
= Sign of country’s factor content of net exports
This test states that:
• if a country is abundant in a factor, then that factor’s
content in net exports should be positive,
• but if a country is scarce in a factor, then that factor’s
content in net exports should be negative.
What is the % of M*C observations that have the same sign?
• The H-O is tested if this number is > 50%.
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3. Testing the HOV Model
2. The rank test

 

Fki  Fl i  Vki  s iVkw  Vl i  s iVl w , i = 1,..., C ; k , l = 1,..., M
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Factor content
of net exports
data
Factor Endowment data
This test implies a pairwise comparison of all factors for all
sectors:
• If the computed factor contents of one factor exceeds
that of a second factor, then we check whether the
relative abundance of that first factor also exceeds the
relative abundance of the second factor.
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3. Testing the HOV Model
• Bowen, Leamer and Sveikaukas (1987).
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
•
•
27 countries and 12 factors.
Both sign and rank test failed.
• Trefler (1995) performs several diagnostic tests on the
data to determine which assumptions of the HOV model
is most likely to be responsible for its failure:
•
Equal technologies across countries is especially unlikely.
• Trefler (1993).
•
•
33 countries. 9 factors. A= US technological matrix (input-output
tables)
Results:
• Both sign and rank test failed when considering same
technology for all countries (USA). Columns 2 and 4.
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3. Testing the HOV Model
• Two ways to introduce technological differences in HOV:
•
•
to model the productivity of factors in different countries.
to model differences in the factor requirements matrix A.
• Trefler (1993) follows the first approach:
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
•
33 countries. 9 factors. A= US technological matrix (input-output
tables).
• πik= the productivity of factor k in country i relative to its productivity
•
•
in the U.S.
πik Vik = The effective endowment of factor k in country i.
Now, A denote the amount of effective factors needed per unit of
output in each industry.
Fki
=
i i
kVk
C
 s   kjVk j
i
j =1
i = 1,..., C ; k = 1,..., M
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3. Testing the HOV Model
Trefler (1993) follows the first approach. Results:
• Allowing for all factors in all but one country to differ in their
productivities the HOV becomes an equality.
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
• However HOV is not testable.
• So how to check the HOV. Two ways:
1. Check whether the productivity parameters are positive;
2. We might compare these parameters to other economic data to
evaluate how “reasonable” the productivity parameters are.
•
For example, it makes sense to compare the labor
productivity parameters to wages across countries.
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3. Testing the HOV Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Labor Productivity
Feenstra and Taylor (2011)
Feenstra and Taylor (2011), FIGURE 4-9
• Labor productivities across countries and their wages, relative to the United
States in 1990, are highly correlated (0.9).
• Then the effective amount of labor found in each country equals the actual
amount of labor times the wage.
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3. Testing the HOV Model
Feenstra (2004)
Trefler (1993) follows the first approach. Results:
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
• To implement this, we need to model Ai in terms of some
productivity differences across countries.
• Trefler considers that the matrices Ai differ by a uniform amount
across countries:
 A =A
i
i
 i 1
• If
A =A
i
US
US

i
country i is less productive than the US.
• Now the HOV expression becomes:

A T = A Y  A D =V  A s D
i
i
i
i
F
i
iUS
i
i
i
i
w

 i C j
=V  A s Y 
 j =1 
i
i
 i C i j
 A T = V s  V 
 j =1

US
i
i
i
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3. Testing the
HOV Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Source: Trefler (1995);
Feenstra (2004). Ex. 2.1 and
2.2.
Columns (1) is per-capita GDP
relative to U.S. per-capita
GDP.
Columns (2) and (4): the sign
and rank tests, assuming that
all countries have the U.S.
technology.
Columns (3) and (5): the sign
and rank tests, allowing for
uniform technological
differences δi across
countries.
Column (6): estimates of δi
and column (7) their
asymptotic t-statistic for the
null hypothesis δi= 1.
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3. Testing the HOV Model
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
Source: Trefler (1995);
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3. Testing the HOV Model
Feenstra and Taylor (2011)
The Sign Test in the Heckscher-Ohlin Model
The Sign Test in a Recent Year
Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
FIGURE 4A-2
The Sign Test for 33 Countries with Differing Technologies, 1990 This table
shows the sign test for the Heckscher-Ohlin model for 1990, allowing for
different technologies across countries. There are 33 countries included in
the study and 9 factors of production. All countries have more factors
passing the sign test than failing it, especially the low- and medium-income
countries. These results show that the sign test holds true when we allow
productivities to differ across countries.
Note: The countries with low GDP per capita are Bangladesh, Pakistan, Indonesia, Sri Lanka, Thailand,
Colombia, Panama, Yugoslavia, Portugal, and Uruguay. The countries with middle GDP per capita are
Greece, Ireland, Spain, Israel, Hong Kong, New Zealand, and Austria. The countries with high GDP per
capita are Singapore, Italy, the United Kingdom, Japan, Belgium, Trinidad, the Netherlands, Finland,
Denmark, former West Germany, France, Sweden, Norway, Switzerland, Canada, and the United States.
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
4. Conclusions
Feenstra and Taylor (2011)
1. In the Heckscher-Ohlin model, we assume that the technologies
are the same across countries and that countries trade because
the available resources (labor, capital, and land) differ across
countries.
2. The Heckscher-Ohlin model is a long-run framework, so labor,
capital, and other resources can move freely between the
industries.
3. With two goods, two factors, and two countries, the HeckscherOhlin model predicts that a country will export the good that uses
its abundant factor intensively and import the other good.
4. The first test of the Heckscher-Ohlin model was made by Leontief
using U.S. data for 1947. He found that U.S. exports were less
capital-intensive and more labor-intensive than U.S. imports. This
was a paradoxical finding because the United States was
abundant in capital.
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Chapter 4: Trade and Resources: The Heckscher-Ohlin Model
4. Conclusions
Feenstra and Taylor (2011)
5. The assumption of identical technologies used in the
Heckscher-Ohlin model does not hold in practice.
6. Current research has extended the empirical tests of
the Heckscher-Ohlin model to allow for many factors
and countries, along with differing productivities of
factors across countries.
7. When we allow for different productivities of labor in
1947, we find that the United States is abundant in
effective—or skilled—labor, which explains the Leontief
paradox.
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