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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 4 of 32
The real wordsTheory

The general equilibrium chain

Your note calls this the reason behind comparative advantage. Reproduce the chain as a chain.

tastes and factor ownership -> commodity demand -> factor demand -> factor prices -> commodity prices -> comparative advantage and trade

The point of it: nothing in the Heckscher-Ohlin model is decided in one market alone. Endowments act on factor prices, and factor prices act on commodity prices. That is the general equilibrium claim.

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