more specialized in the production of exportable products (or rising-price products more
generally) tend to gain income, and factors more specialized in the production of
import-competing products (or falling-price products more generally) tend to lose income. This
pattern applies to both the short and the long run, and especially applies to factors that can only
be used in one industry (sector-specific factors).
Third, the H-O approach has a surprising implication for the earnings of a single factor in
different countries. The factor price equalization theorem states that free trade that equalizes
product prices between countries also equalizes the prices of individual factors between
countries. The logic of this can be developed intuitively. With no trade, the price of a factor will
be “high” in the country in which it is scarce, and “low” in the country in which it is abundant.
The shift to free trade increases the factor’s price in the abundant country and decreases its price
in the scarce country. Under “ideal” conditions, the factor’s prices (in real terms) become equal in
different countries. In its impact on differences in factor prices, product trade can be a substitute
for international movement of factors.
The chapter then shifts to examine empirical evidence on the Heckscher-Ohlin theory. The box
“The Leontief Paradox” summarizes the early tests. The text emphasizes the kinds of information
that we need to examine real-world trade patterns—factor endowments and trade patterns, along
with knowledge of the factor proportions used in producing different products. It provides
evidence on endowments for seven factors—physical capital, highly skilled labor,
medium-skilled labor, unskilled labor, crop land, pasture land, and forest land, and it discusses
endowments of other natural resources. The examination of the U.S. pattern of international trade
suggests that some of its trade seems consistent with the H-O predictions, but some also does not
seem consistent. In general, trade patterns for the United States and other countries match the
H-O theory reasonably well but not perfectly. (The box “China’s Exports and Imports,” the
second in the series of boxes that Focus on China, shows that much of China’s trade is also
consistent with the H-O predictions, especially once we recognize China’s role in labor-intensive
assembly of electrical and electronic products that are then exported.)
According to the H-O approach and the Stolper-Samuelson theorem, the factors that gain from
free trade are those that are used intensively in export-oriented production, while the factors that
lose are those used intensively in import-competing production. The chapter presents evidence
on the factor content of export and import-competing production in the United States and
Canada, along with brief comments about other countries.
Finally, the chapter provides evidence on international factor price equalization. While it clearly
does not hold perfectly, even if we define factors carefully, we do see tendencies toward factor
price equalization. Most obviously, as countries in Asia have integrated themselves into world
trade, real wages in these countries have increased, to lessen international wage gaps. For China,
increased demand for less-skilled workers has led to rapidly rising real wages. For India, wages
for workers in business services have been rising relatively rapidly.
The box “U.S. Jobs and Foreign Trade” (another Focus on Labor) provides a survey of the
effects of international trade that focuses on employment. While this is not the most valid way to
examine the effects of trade (as noted at the end of the box), it is the way that much of the debate