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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 3 of 32
The real wordsTheory

Where the slides stop

The published deck for chapter 5 is nine pages and ends with the theorem you just read. It never reaches the second theorem, and the deck says only that the theory rests on two.

Everything from here to the end of this chapter is built from your long note and the textbook.

Check against your class slides, especially the empirical section: the professor clearly taught past the deck, so your own notes are the better record of what was said.

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