OTHER TRADE THEORIES

(Source: Chapter 4 & 5, International Economics,16th ed. by Pugel)

1. THE HECKSCHER–OHLIN (H–O) THEORY

- a theory of trade named after Eli Heckscher, a noted Swedish economic historian, who
developed the core idea in a brief article in 1919, and his student Bertil Ohlin (who
developed and publicized and provides a clear overall explanation in the 1930s).

-this theory predicts that a country exports the product (or products) that uses its relatively
abundant factor(s) intensively and imports the product (or products) that uses its relatively
scarce factor(s) intensively.

A country is relatively labor-abundant if it has a higher ratio of labor to other factors than
does the rest of the world.

A product is relatively labor-intensive if labor costs are a greater share of its value than
they are of the value of other products.

The Heckscher–Ohlin (H–O) theory focuses on another important source of production-

side differences. International differences in the shapes of bowed-out Production
Possibility Curve (PPC) can occur because (1) different products use the factors of
production in different proportions and (2) countries differ in their relative factor
endowments. The H–O theory of trade patterns predicts that a country exports products
that are produced with more intensive use of the country’s relatively abundant factors in
exchange for imports of products that use the country’s relatively scarce factors more
intensively.

THREE IMPLICATIONS OF THE H–O THEORY

The Stolper–Samuelson Theorem

This theorem states that, given certain conditions and assumptions, including full
adjustment to a new long-run equilibrium, an event that changes relative product prices
in a country unambiguously has two effects:
• It raises the real return to the factor used intensively in the rising-price industry.
• It lowers the real return to the factor used intensively in the falling-price industry.
The Specialized-Factor Pattern

The Stolper–Samuelson theorem uses only two factors and two products. Its results are
part of a broader pattern, one that tends to hold for any number of factors and products.

• The more a factor is specialized, or concentrated, in the production of a product whose

relative price is rising, the more this factor stands to gain from the change in the product
price.

• The more a factor is concentrated into the production of a product whose relative price
is falling, the more it stands to lose from the change in the product price.

The Factor-Price Equalization Theorem

This theorem states that, given certain conditions and assumptions, free trade equalizes
not only product prices but also the prices of individual factors between the two
countries. The factor-price equalization theorem implies that laborers will end up
earning the same wage rate in all countries, even if labor migration between countries
is not allowed. Trade makes this possible, within the assumptions of the model, because
the factors that cannot migrate between countries end up being implicitly shipped
between countries in commodity form.