Skip to content
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 2 of 24
The real wordsTheory

The two extensions

The deck says the trade model is being extended to include two things. Both are exam-worthy and they are different questions.

  1. The basis of comparative advantage. Why does productivity differ between nations in the first place?
  2. The effect of international trade on the return to labour. What does trade do to wages inside each country?

Your note adds the criticism this answers: the classical economists said comparative advantage came from differences in labour productivity, but they never explained why productivity differs.

← BackContinue →