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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 2 of 32
The real wordsTheory

The Heckscher-Ohlin theorem

This is the last thing on the slide deck, and it is worth memorising word for word.

The Heckscher-Ohlin theoremA nation will export the commodity whose production requires the intensive use of the nation's relatively abundant and cheap factor, and import the commodity whose production requires the intensive use of the nation's relatively scarce and expensive factor.

Shorter, from your note: a labour-rich country exports labour-intensive goods; a capital-rich country exports capital-intensive goods.

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