3 Factor proportions model (Heckscher-Ohlin)

(Heckscher-Ohlin)

Countries have comparative advantage in, and therefore export, goods that use relatively intensively their relatively abundant factors.

1. 2 goods

2. 2 countries

3. 2 Production factors: Capital and labor

4. Prod. factors are fully emplooyed, freely mobile across sectors and immobile across countries

5. Constant returns to scale

6. goods markets and factor markets are perfectly competitive

7. Identical and homothetic preferences of consumer

8. trade is balanced

9. All labor is paid the same wage

1. Factor price equalization: Trade causes prices of factors in different countries to move together, becoming equal across countries

2. Stolper-Samuelson Theorem: Real price (wage in terms of goods it can buy) of a country’s abundant factor rises due to trade; Real price (wage) of its scarce factor falls

—> losers from trade are the owners of a country’s scarce factor