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Sem 5 Prep
← Intl TradeThe Heckscher-Ohlin theorems and factor prices

Formulas for this chapter

Capital intensity of a trade bundle

Capital per worker-year = capital embodied / worker-years embodied

Leontief's measure. Compute it for the export bundle and for the import-substitute bundle, then compare: for a capital-abundant nation the H-O theorem predicts exports to be the higher figure.

Capital embodied
Value of capital in a representative bundle, from the input-output table
Worker-years embodied
Labour in the same bundle

Percentage more capital intensive

% = (import-substitute ratio - export ratio) / export ratio x 100

To reproduce Leontief's 30 per cent and 6 per cent figures. Always state which bundle is the base, because reversing it changes the answer.

Export ratio
Capital per worker-year in the export bundle, the base
Import-substitute ratio
Capital per worker-year in the import-substitute bundle

Narrowing of a factor-price gap

Narrowing % = (gap before - gap after) / gap before x 100

To quantify factor-price equalisation. Both ends of the gap move, so recompute each nation's w and r before differencing.

Gap
High-wage nation's w minus low-wage nation's w, or the same for r or w/r
Step 1 of 32
The ideaTheory

Sell what you have too much of

A country with a lot of workers and few machines will find that workers are cheap there and machines are dear.

So the goods that need a lot of workers are cheap to make there. Sell those. Buy the machine-heavy goods from somewhere machines are cheap.

That single sentence is the Heckscher-Ohlin theorem. Everything else in this chapter is what follows from it, including one result that goes badly for workers in rich countries.

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