The Heckscher-Ohlin-Samuelson

Theorem
• ECN 3860
• International
Economics
 The Classical and Neo-Classical
Models of International Trade
• The Classical model of international trade is based on the “Labor Theory of
Value”; it assumes only one factor of production, identical technology between
the two countries, identical tastes, etc.. The model promotes specialization and
requires complete specialization for at least one country, due to constant
opportunity costs.

• Given a concave production possibilities frontier, international trade should lead

to incomplete specialization, due to increasing costs.

• The Neo-Classical models of international trade assume more than one factor of
production. The Heckscher-Ohlin-Samuelson model (also known as the Factor
Endowment or the Variable Proportion Model) not only describes the pattern of
trade, but it also predicts the impact of trade on the national income and returns
to the factors of production.
 Other Assumptions:
• two countries, two factors, two products;
• perfect competition in all markets;
• Free trade;
• Factors of production are available in fixed amounts in each country;
• Full mobility of factors of production between industries within each
country;
• Immobility of factors of production between countries;
• The two countries are alike with respect to tastes;
• Technology is available to both countries; and
• Linear homogeneous production functions of degree one (constant
returns to scale).
 The Heckscher-Ohlin Theorem
Critical Assumptions:
• Countries are characterized by different factor
endowments--a country is capital abundant if it has
a higher ratio of capital to other factors than does its
trading partner;
• There are different factor intensities between
products--a product is capital-intensive if, at
identical wages and rents, its production requires
more capital per worker than does the other product.
 The H-O Theorem
• Given identical production functions but different factor
endowments between countries, a country will tend to
export the commodity which is relatively intensive in her
relatively abundant factor
• In general, countries tend to have comparative advantage in
the products that are relatively intensive in their relatively
abundant factors
The Stolper-Samuelson Theorem:
Assumptions:
• One country produces two goods (wheat and cloth) with two factors of
production (capital and labor);
• neither good is an input into the production of the other;
• competition prevails;
• factor supplies are given;
• both factors are fully employed;
• both factors are mobile between sectors (but not between countries);
• one good (wheat) is capital-intensive and the other (cloth) is labor-
intensive);
• opening trade raises the relative price of the export good.
The Stolper-Samuelson Theorem
• moving from no trade to free trade raises
the returns to the factor used intensively in
the rising-price industry, and lowers the
returns to the factor used intensively in the
falling-price industry, regardless of which
goods the sellers of the two factors prefer to
consume
 The Factor Price Equalization
Theorem
Assumptions:
• there are two countries using two factors of production producing two
products;
• competition prevails in all markets;
• each factor supply is fixed, and there is no migration between countries;
• each factor is fully employed in each country with or without trade;
• there are no transportation or information costs;
• free trade;
• production functions exhibit constant returns to scale, and are the same
between countries for any industry;
• production functions are not subject to factor intensity reversals; and
• both countries produce both products with or without trade.
 The Factor Price Equalization
Theorem
• Free trade will equalize not only
commodity prices but also factor prices,
so that all workers earn the same wage
rate and all units of capital will earn the
same rental return in both countries
regardless of the factor supplies or the
demand patterns in the two countries
Hourly Pay in Manufacturing
Country Hourly Pay
(1990 U.S. = 100)
Germany 138
France 98
Japan 82
Taiwan 24
Mexico 12
Poland 6
 The Leontief Paradox
In 1953 Wassily Leontief published the results of the most famous empirical
investigations in economics, an attempt to test the consistency of the H-O Model
with the U.S. trade patterns.

Leontief’s objectives were:

• to prove that the H-O Model was correct; and

• to show that the U.S. exports were capital intensive

Leontief developed a 1947 input-output table for the U.S. to determine the
capital-labor ratios used in the production of U.S. exports and imports. Leontief
found that the U.S. exports used a capital-labor ratio of $13,991 per man year,
whereas import substitutes used a ratio of $18,184 per man year.
 The Leontief Paradox
The key ratio of [( KX / LX ) / ( KM / LM )]

(13,991 / 1) / (18,184 / 1) = 0.77

was calculated. Given the presumption that the U.S.

was relatively capital abundant, that ratio was just the
reverse of what the H-O Model predicted. Thus, it is
called the Leontief Paradox.