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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 4 of 24
The real wordsTheory

Assumptions 6 to 11

  1. Tastes are the same in both nations
  2. Both commodities and factors are traded in perfectly competitive markets
  3. Perfect factor mobility within each nation, but none between nations
  4. No transportation costs, tariffs or other barriers to free trade
  5. All resources are fully employed in both nations
  6. International trade between the nations is balanced

Assumption 8 is the one that makes trade interesting: goods can cross the border, factors cannot.

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