Heckscher-Ohlin model:
● 2 x 2 x 2-model
- 2 countries: Home and Foreign
- 2 products: cloth (C) and food (F)
- 2 factors of production: capital (K) and labour (L) that are mobile across
sectors but not mobile across countries
The factor availability differs across the two countries: one country possesses
relatively more labour (is labour-abundant), whereas the other country
possesses relatively more capital (is capital-abundant).
If labour becomes relatively more expensive, labour will be substituted for by capital
and vice versa.
● Under autarky:
● Differences in factor availability and thus not via differences in productivity as in the
Ricardian model.
The larger the quantity of cloth that is produced, the more
food the country has to sacrifice for additional cloth: the
opportunity costs of cloth in terms of food rises with the
quantity of cloth produced.
The value of production (V) equals V = PC * QC + PF * QF
Slope is relative price of cloth in terms of food: – (PC / PF) so
The further the isovalue line from the origin, the higher the value of production.
QF = (V / PF)– (PC / PF) * QC
CC is to the right of FF, because cloth (labor-intensive) for given wage-rental rate we have
for CC a larger L/K ratio when compared with FF. If w/r decreases, labour gets relatively
cheaper, so we use more labor than capital, so substitute capital for labor (mobility). This
happens in both sectors.
When Home labor-abundant means low w/r rate, so comparative advantage.
● 2 x 2 x 2-model
- 2 countries: Home and Foreign
- 2 products: cloth (C) and food (F)
- 2 factors of production: capital (K) and labour (L) that are mobile across
sectors but not mobile across countries
The factor availability differs across the two countries: one country possesses
relatively more labour (is labour-abundant), whereas the other country
possesses relatively more capital (is capital-abundant).
If labour becomes relatively more expensive, labour will be substituted for by capital
and vice versa.
● Under autarky:
● Differences in factor availability and thus not via differences in productivity as in the
Ricardian model.
The larger the quantity of cloth that is produced, the more
food the country has to sacrifice for additional cloth: the
opportunity costs of cloth in terms of food rises with the
quantity of cloth produced.
The value of production (V) equals V = PC * QC + PF * QF
Slope is relative price of cloth in terms of food: – (PC / PF) so
The further the isovalue line from the origin, the higher the value of production.
QF = (V / PF)– (PC / PF) * QC
CC is to the right of FF, because cloth (labor-intensive) for given wage-rental rate we have
for CC a larger L/K ratio when compared with FF. If w/r decreases, labour gets relatively
cheaper, so we use more labor than capital, so substitute capital for labor (mobility). This
happens in both sectors.
When Home labor-abundant means low w/r rate, so comparative advantage.
