CHAPTER 4CHAPTER 4

Who Gains and Who Who Gains and Who Loses from TradeLoses from Trade

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Short-run effects of opening trade

For the short-run gains and losses divide by output sector: All groups tied to rising sectors gain, and all groups tied to declining sectors lose.

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The long-run factor-price response

In the long run, factors can move between sectors in response to differences in returns.

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Figure 4.2

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Stolper-Samuelson theorem

Under certain conditions and assumptions, in a long-run term, the real return to the factor used intensively in the rising-price industry increases, and the real return to the factor used intensively in the falling-price industry declines.

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Assumptions of the Stolper-Samuelson theorem

• An economy can produce two goods, cloth and wheat.

• The production of these goods requires two inputs that are in limited supply; labor (L) and land (T).

• Production of wheat is land-intensive and production of cloth is labor-intensive in both countries.

• Perfect competition prevails in all markets.

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Specialized-factor pattern

Factors more specialized in the production of exportable products (or rising-price products more generally) tend to gain income, and factors more specialized in the production of import-competing products (or falling-price products more generally) tend to lose income. (For any number of factors and products)

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Assumptions of The Factor-Price Equalization Theorem

Both countries produce both goodsBoth countries have the same

technologies in productionBoth countries have the same prices of

goods due to trade

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The Factor-Price Equalization Theorem

With the shift to free trade: For each factor, its rate of return becomes more similar between countries. Under ideal conditions, its real rate of return is the same in different countries, even if factors cannot migrate between countries directly.

 

Example:

Labor.

 

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The Factor-Price Equalization Theorem

With no trade, the wage rate is high in the labor-scarce country. The wage rate is low in the labor-abundant country.

 

With free trade, the import of labor-intensive products pushes the wage-rate down in the labor-scarce country. The export of labor-intensive products pulls the wage rate up in the labor-abundant country.

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The Leontief Paradox

The first serious attempt to test the H-O theory was made by Professor Wassily W. Leontief in 1954.

Leontief reached a paradoxical conclusion that the US (the most capital abundant country in the world by any criterion) exported labor-intensive commodities and imported capital- intensive commodities. This result has come to be known as the Leontief Paradox.

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Empirical Evidence on the Heckscher-Ohlin Model

Factor Content of U.S. Exports and Imports for 1962

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Testing the Heckscher-Ohlin Model

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Testing the Heckscher-Ohlin Model

Implications of the TestsEmpirical evidence on the Heckscher-

Ohlin model has led to the following conclusions:It has been less successful at explaining the

actual pattern of international trade.It has been useful as a way to analyze the

effects of trade on income distribution.

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Questions

Consider the following data on some of Japan’s exports and imports in 2006, measured in billions of U.S. dollars:

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Questions and problem

For which of these products do Japan’s exports and imports appear to be consistent with the predictions of the Heckscher-Ohlin theory? Which appear to be inconsistent?

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Questions and problem

“The factor-price equalization theorem indicates that with free trade the real wage earned by labor becomes equal to the real rental rate earned by landowners.” Is this correct or not? Why?