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Sem 5 Prep
← Intl TradeFactor endowments: the Heckscher-Ohlin setup

Formulas for this chapter

Factor intensity

Y is capital intensive if (K/L) in Y > (K/L) in X, in the same nation

Whenever a question gives capital and labour requirements per unit of output. Compare two goods inside one nation, never the same good across nations.

K
Units of capital used per unit of output of that good
L
Units of labour used per unit of output of the same good

Factor abundance in physical units

Nation 2 is capital abundant if (TK/TL) in Nation 2 > (TK/TL) in Nation 1

When a question gives each nation's total capital and total labour. Compare the ratios; a nation with less capital in total can still be capital abundant.

TK
Total capital available in the nation
TL
Total labour available in the nation

Factor abundance in relative factor prices

Nation 2 is capital abundant if P(K)/P(L) = r/w is LOWER in Nation 2

When a question gives interest rates and wages. Note the reversed direction against the physical definition: an abundant factor is a cheap factor.

r
Rental price of capital, usually the interest rate
w
Price of labour time, the wage rate
Step 1 of 24
The ideaTheory

Ricardo never said why

Ricardo proved that the United Kingdom should export cloth because its cloth productivity was relatively better. He never said why its cloth productivity was relatively better.

It is like being told a runner won because he ran faster. True, and useless.

Heckscher and Ohlin answer the question. Countries differ in what they have a lot of, and goods differ in what they need a lot of. Match those two facts and the pattern of trade falls out.

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