Chapter 5
Resources and Trade: The Heckscher-Ohlin Model
◼ Chapter Organization
Model of a Two-Factor Economy
Prices and Production
Choosing the Mix of Inputs
Factor Prices and Goods Prices
Resources and Output
Effects of International Trade between Two-Factor Economies
Relative Prices and the Pattern of Trade
Trade and the Distribution of Income
Case Study: North-South Trade and Income Inequality
Case Study: Skill-Biased Technological Change and Income Inequality
Factor-Price Equalization
Empirical Evidence on the Heckscher-Ohlin Model
Trade in Goods as a Substitute for Trade in Factors: Factor Content of Trade
Patterns of Exports between Developed and Developing Countries
Implications of the Tests
Summary
APPENDIX TO CHAPTER 5: Factor Prices, Goods Prices, and Production Decisions
Choice of Technique
Goods Prices and Factor Prices
More on Resources and Output
◼ Chapter Overview
In Chapter 3, trade between nations was motivated by differences internationally in the relative productivity
of workers when producing a range of products. In Chapter 4, the Specific Factors model considered
additional factors of production, but only labor was mobile between sectors. In Chapter 5, this analysis
goes a step further by introducing the Heckscher-Ohlin theory.
The Heckscher-Ohlin theory considers the pattern of production and trade that will arise when countries
have different endowments of such factors of production as labor, capital, and land and where these factors
are mobile between sectors in the long run. The basic point is that countries tend to export goods that are
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2. The definition of cattle raising as land intensive depends on the ratio of land to labor used in
5. Specific programmers may face wage cuts due to the competition from India, but this is not inconsistent
with skilled labor wages rising. By making programming more efficient in general, this development
may have increased wages for others in the software industry or lowered the prices of the goods overall.
In the short run, though, it has clearly hurt those with sector-specific skills who will face transition costs.
There are many reasons to not block the imports of computer programming services (or outsourcing
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7. If the efficiency of the factors of production differs internationally, the lessons of the Heckscher-
Ohlin theory would be applied to “effective factors,” which adjust for the differences in technology
or worker skills or land quality (for example). The adjusted model has been found to be more