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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 3 of 24
The real wordsTheory

Assumptions 1 to 5

The deck numbers these one to eleven across two slides. Learn them in order.

  1. Two nations, two goods, two factors of production
  2. Technology is the same in both nations
  3. Commodity X is labour intensive, commodity Y is capital intensive, in both nations
  4. Constant returns to scale for X and Y in both nations
  5. Incomplete specialisation in production in both nations

Note assumption 3. Which good is which is fixed, and it is the same in both nations. Chapter 5 later shows what breaks if it is not.

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