Sources of Comparative

Advantage

PowerPoint slides prepared b

Andreea Chiritescu
Eastern Illinois University
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for
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classroom use

Factor Endowments
Factor-endowment theory
Heckscher-Ohlin theory
Ultimate determinants of comparative
advantage
Technology
Resource endowments
Demand

Assumption: technology and demand

are approximately the same between
countries
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for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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Factor Endowments
Factor-endowment theory
Resource-endowment ratio
Determines comparative advantage

Export the product that uses a large

amount of its relatively abundant
resource/factor
Import the product which in production
uses the relatively scarce resource
With trade, the relative differences in
resource prices between nations tend to
be eliminated

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Producing aircraft and textiles: factor

TABLE 3.1
endowments in the United States and
China

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for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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Factor Endowments
Effect of resource endowments on
comparative advantage

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
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Factor Endowments
Factor-endowment theory, U.S.-China
trade
United States
Relatively abundant: human capital (skills),
scientific talent, and engineering talent are
relatively abundant
Relatively scarce: unskilled labor is relatively
scarce

China
Relatively rich: unskilled labor
Relatively scarce: scientific and engineering
2011 Cengage talent
Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
website for classroom use

Factor Endowments
Factor-endowment theory, U.S.-China
trade
United States exports to China
Goods embodying relatively large amounts of
skilled labor and technology
Aircraft, software, pharmaceuticals, and high-tech
components of electrical machinery and equipment

China exports to the United States

Goods for which a relatively large amount of
unskilled labor is used
Apparel, footwear, toys, and the final assembly of
electronic machinery and equipment
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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TABLE 3.3 U.S.-China trade: top ten products,

2007 (thousands of dollars)

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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Factor Endowments
Stolper-Samuelson Theorem
Extension of Heckscher-Ohlin theory
An increase in the price of a product
Increases the income earned by resources
that are used intensively in its production

A decrease in the price of a product

Reduces the income of the resources that
it uses intensively

Some people will suffer losses from

free trade
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for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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Factor Endowments
Magnification effect of StolperSamuelson theorem
The change in the price of a resource
is greater than the change in the price
of the good that uses the resource
relatively intensively in its production
process

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Factor Endowments
Policy implications of StolperSamuelson theorem
Even though free trade may provide
overall gains for a country
There are winners and losers

Owners of relatively abundant

resources
Favor free trade

Owners of relatively scarce factors

Favor trade restrictions

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Increasing Returns to Scale

Increasing-returns trade theory
Nations with similar factor endowments
Negligible comparative-advantage differences

May find it beneficial to trade

Because they can take advantage of
massive economies of scale
Develop an industry that has economies of
scale
Produce that good in great quantity at low
average unit costs
Trade those low-cost goods to other nations
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FIGURE
3.5

Economies of scale as a basis for

trade

By adding to the size of the domestic market, international trade permits

longer production runs by domestic firms, which can lead to greater
efficiency and reductions in unit costs.
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Increasing Returns to Scale

Increasing-returns trade theory
The home market effect
Countries will specialize in products that have a
large domestic demand.
By locating close to its largest market, an
increasing scale industry can minimize the cost
of shipping its products to its customers while
still taking advantage of economies of scale
On the contrary, small-market areas are likely
to become deindustrialized as industries move
to take advantage of scale economies and low
transportation costs.
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External Economies of Scale

External economies of scale
The average cost of the typical firm
decreases
As the output of the industry within this
area increases

Concentration of an industrys firms in a

particular geographic
Larger pools of a specialized type of worker

New knowledge about production

technology spreads among firms in the
area

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for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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