APPLICATION

Are Factor Intensities the Same Across Countries?

One of our assumptions for the Heckscher-Ohlin (HO) model is that the
same good (shoes) is labor-intensive in both countries. Specifically, we
assume that in both countries, shoe production has a higher labor–capital
ratio than does computer production. Although it might seem obvious that
this assumption holds for shoes and computers, it is not so obvious when
comparing other products, say, shoes and call centers.

Despite its nineteenth century exterior, this New Balance factory in Maine
houses advanced shoe manufacturing technology.
In principle, all countries have access to the same technologies for making
footwear. In practice, however, the machines used in the United States
are different from those used in Asia and elsewhere. While much of the
footwear in the world is produced in developing nations, the United States
retains a small number of shoe factories. New Balance, which
manufactures sneakers, has five plants in the New England states, and
25% of the shoes it sells in North America are produced in the United
States. One of their plants is in Norridgewock, Maine, where employees
operate computerized equipment that allows one person to do the work of
six. This is a far cry from the plants in Asia that produce shoes for Nike,
Reebok, and other U.S. producers. Because Asian plants use older
technology (such as individual sewing machines), they use more workers
to operate less productive machines.
In call centers, on the other hand, technologies (and, therefore, factor
intensities) are similar across countries. Each employee works with a
telephone and a personal computer, so call centers in the United States
and India are similar in terms of the amount of capital per worker that they
require. The telephone and personal computer, costing several thousand
dollars, are much less expensive than the automated manufacturing
machines in the New Balance plant in the United States, which cost tens
or hundreds of thousands of dollars. So the manufacture of footwear in
the New Balance plant is capital-intensive as compared with a U.S. call
center. In India, by contrast, the sewing machine used to produce
footwear is cheaper than the computer used in the call center. So footwear
production in India is labor-intensive as compared with the call center,
which is the opposite of what holds in the United States. This example
illustrates a reversal of factor intensities between the two countries.
The same reversal of factor intensities is seen when we compare the
agricultural sector across countries. In the United States, agriculture is
capital-intensive. Each farmer works with tens of thousands of dollars in
mechanized, computerized equipment, allowing a farm to be maintained
by only a handful of workers. In many developing countries, however,
agriculture is labor-intensive. Farms are worked by many laborers with
little or no mechanized equipment. The reason that this labor-intensive
technology is used in agriculture in developing nations is that capital
equipment is expensive relative to the wages earned.
In assumption 2 and Figure 4-1, we assume that the labor–capital ratio
(L/K) of one industry exceeds that of the other industry regardless of the
wage-rental ratio (W/R). That is, whether labor is cheap (as in a
developing country) or expensive (as in the United States), we are
assuming that the same industry (shoes, in our example) is labor-intensive
in both countries. This assumption may not be true for footwear or for
agriculture, as we have just seen. In our treatment of the HO model, we
ignore the possibility of factor intensity reversals. The reason for ignoring
these is to get a definite prediction from the model about the pattern of
trade between countries so that we can see what happens to the price of
goods and the earnings of factors when countries trade with one another.