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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 5 of 24
The real wordsTheory

What the assumptions mean

Your long note glosses each one. The five that questions actually probe:

  • Same technology: both countries can use the same production methods, so technology cannot be the source of the difference
  • Constant returns to scale: raise both labour and capital by the same percentage and output rises by that percentage
  • Incomplete specialisation: even with free trade, both countries still produce both goods
  • Equal tastes: at equal prices both countries consume the two goods in the same proportions
  • Balanced trade: the value of exports equals the value of imports for each nation
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