4 Trade and Resources: The Heckscher–Ohlin Model
1. In this problem you will learn how to download data for U.S. export and imports for
highly disaggregated products. Supposes that you are hired by a company that wants
to start exporting the product it already sells in the United States. You are asked to
find out how much is already sold abroad by other U.S. firms and to which countries.
To answer this question, you can access the “Trade Stats Express” database at the
International Trade Administration, U.S. Department of Commerce.
U.S. Exports and Imports for 2014
HS Code Product
Region or
Country
Export
($ thousands)
Import
($ thousands)
09
Coffee, Tea, Mate,
and Spices
Africa 3,666 356,399
0901
Coffee
Africa
209
225,090
0902
Tea
Africa
291
34,781
0904
Pepper
Africa
1,794
0
0905
Vanilla Beans
Africa
0
74,809
0910
Ginger, Saffron,
Turmeric, Thyme,
Bay Leaves, etc.
Africa 1,235 9,359
09
Coffee, Tea, Mate,
and Spices
Kenya 12 52,966
0901
Coffee
Kenya
12
43,692
0902
Tea
Kenya
0
9,260
0904
Pepper
Kenya
0
0
0905
Vanilla Beans
Kenya
0
0
0910
Ginger, Saffron,
Turmeric, Thyme,
Bay Leaves, etc.
Kenya 0 14
a. Start at the webpage http://www.trade.gov/, and find Trade Stats Express under the
Data & Analysis tab. Choose National Trade Data, and Product Profiles of U.S.
Merchandise Trade with a Selected Market. You will be asked to select a Region
or Trade Partner, to select Export, Imports, or Trade Balance, and then to select a
Product. The method of keeping track of products is called the Harmonized
System (HS). On this page, the HS codes for products can have 2 digits or 4
digits, so choose 4 digits. Change the product from HS-total to any particular
product that you find interesting out of the 99 HS codes that are shown, from HS
01 to HS 99. For the product that you have selected, choose a region of the world,
and write down in a table the exports to that region of the 2-digit and detailed 4-
digit products that are shown (see an example for HS 09 in the table).
Answer: The argument depends on the chosen countries and the trade pattern
within the United States. The below argument is an example based on the table
provided.
b. Repeat the same exercise for the imports to the United States from that region for
the 2–digit and detailed 4-digit products that are shown (see table on the previous
page).
Answer: Answers will vary.
c. Now choose at least one specific country in the region that you have chosen, and
write down the U.S. exports and imports for the same 2-digit and 4-digit HS
products (see table on the previous page).
Answer: Answers will vary.
d. Do you think that the U.S. exports and imports for this region/country/products
you have chosen support the predictions of the Heckscher–Ohlin theorem?
Explain why or why not. Do you think that there is potential for the U.S. firm that
hired you to begin exporting these products? Explain.
Answer: Answers will vary.
2. This problem uses the Heckscher–Ohlin model to predict the direction of trade.
Consider the production of handmade rugs and assembly line robots in Canada and
India.
a. Which country would you expect to be relatively labor-abundant, and which is
capital–abundant? Why?
Answer: Given Canada’s relatively small population (approximately 30 million
b. Which industry would you expect to be relatively labor-intensive, and which is
capital-intensive? Why?
c. Given your answers to (a) and (b), draw production possibilities frontiers for each
country. Assuming that consumer preferences are the same in both countries, add
indifference curves and relative price lines (without trade) to your PPF graphs.
What do the slopes of the price lines tell you about the direction of trade?
d. Allowing for trade between countries, redraw the graphs and include a “trade
triangle” for each country. Identify and label the vertical and horizontal sides of
the triangles as either imports or exports.
Answer: See the following figures.
e. Using the PPF graphs from (c) and relative prices under autarky and trade, explain
how both countries gain from trade?
Answer: See figures below. The dashed lines represent the budget line and obtained
3. Leontief’s paradox is an example of testing a trade model using actual data
observations. If Leontief had observed that the amount of labor needed per $1 million
of U.S. exports was 100 person-years instead of 182, would he have reached the same
conclusion? Explain.
Answer: If the amount of labor required for $1 million of U.S. exports were 100
Work It Out
Suppose that there are drastic technological improvements in shoe production in
Home such that shoe factories can operate almost completely with computer–aided
machines. Consider the following data for the Home country:
Computers: Sales revenue =
=100
Payments to labor = =50
Payments to capital = =50
Percentage increase in the price = ∆
⁄=0%
a. Which industry is capital-intensive? Is this a reasonable question, given that some
industries are capital-intensive in some countries and labor-intensive in others?
Answer: >
⁄
⁄ (and thus >
⁄
⁄) implies that shoes
b. Given the percentage changes in output prices in the data provided, calculate the
percentage change in the rental on capital.
Answer:
For computers: ∆
⁄ = [(∆
⁄)
−(∆
⁄)]
⁄
c. How does the magnitude of this change compare with that of labor?
d. Which factor gains in real terms, and which factor loses? Are these results
consistent with the Stolper–Samuelson theorem?
Answer: Because the increase in capital returns (+50%) exceeds the price
changes in both industries, capital gains in real terms. Similarly, because there is a
4. Using the information in the chapter, suppose Home doubles in size, while Foreign
remains the same size. Show that an equal proportional increase in capital and labor
in Home will change the relative price of computers, wage, rental on capital, and the
amount traded but not the pattern of trade.
Answer: An equal proportional increase in Home’s capital and labor does not change
its relative factor endowments, so the labor/capital ratio is unchanged. With constant
5. Using a diagram similar to Figure 4–12, show the effect of a decrease in the relative
price of computers in Foreign. What happens to the wage relative to the rental? Is
there an increase in the labor–capital ratio in each industry? Explain.
Answer: With free trade the labor-abundant Foreign country will increase production
6. Suppose when Japan opens to trade, it imports rice, a labor-intensive good.
a. According to the Heckscher–Ohlin theorem, is Japan capital-abundant or labor-
b. What is the impact of opening trade on the real wage in Japan?
Answer: Japan will specialize in the capital-intensive product, which will lead to
c. What is the impact of opening trade on the real rental on capital?
Answer: The
real
rental on
capital
will
increase because
the world
relative
price of
d. Which group (capital owner or labor) would support policies to limit free trade?
Briefly explain.
Answer: The labor group will support policies to limit free trade because they
7. In Figure 4-3, we show how the movement from the no-trade equilibrium point A to a
trade equilibrium at a higher relative price of computers leads to an upward-sloping
export supply, from points A to D in panel (b).
a. Suppose that the relative price of computers continues to rise in panel (a), and
label the production and consumption points at several higher prices.
Answer: See the following figure.
b. In panel (b), extend the export supply curve to show the quantity of exports at the
higher relative prices of computers.
Answer: Refer to the following diagram. At the no-trade price of (
⁄)= 0.5,
Home exports 0 units of computers, which is the starting point for the Home
export supply curve in panel (b). As the world relative price of computers rises,
c. What happens to the export supply curve when the price of computers is high
enough? Can you explain why this happens? Hint: An increase in the relative
price of a country’s export good means that the country is richer because its terms
of trade have improved. Explain how that can lead to fewer exports as their price
rises.
Answer: As the world–relative price for computers rises, this is a terms-of-trade
gain for the Home country, which exports computers. From the point of view of
8. On March 2, 2013, Tajikistan successfully negotiated terms to become a member of
the World Trade Organization. Consequently, countries such as those in western
Europe are shifting toward free trade with Tajikistan. What does the Stolper–
Samuelson theorem predict about the impact of the shift on the real wage of low-
skilled labor in western Europe? In Tajikistan?
Answer: According to the Stolper–Samuelson theorem, the real wage of unskilled
9. Following are data for soybean yield, production, and trade for 2010–2011:
Yield
(metric
ton/hectare)
Production
(100,000
metric tons)
Export
(100,000
metric tons)
Import
(100,000
metric tons)
Australia
1.71
0.29
0.025
0.007
Brazil
3.12
748.2
258
1.18
Canada
2.75
42.5
27.8
2.42
China
1.89
144
1.64
570
France
2.95
1.23
0.24
5.42
Japan
1.60
2.19
0.0006
34.6
Mexico
1.32
2.05
0.001
37.7
Russian
Federation
1.48
17.6
0.008
10.7
United States
2.79
831
423
4.45
Data from: Food and Agriculture Organization.
Suppose that the countries listed in the table are engaged in free trade and that
soybean production is land-intensive. Answer the following:
a. In which countries does land benefit from free trade in soybeans? Explain.
b. In which countries does land lose from free trade in soybeans? Explain.
c. In which countries does the move to free trade in soybeans have little or no effect
on the land rental? Explain.
10. According to the Heckscher–Ohlin model, two countries can equalize wage
differences by either engaging in international trade in goods or allowing high–skilled
and low-skilled labor to freely move between the two countries. Discuss whether this
is true or false, and explain why.
Answer: Allowing skilled workers to migrate to skilled-labor-scarce countries and
unskilled workers to migrate to unskilled-labor-scarce countries reduces the ratio of
11. According to the standard Heckscher–Ohlin model with two factors (capital and
labor) and two goods, the movement of Turkish migrants to Germany would decrease
the amount of capital-intensive products produced in Germany. Discuss whether this
is true or false, and explain why.
Answer: An increase in a factor of production raises the production of the good that