International Economics
By Robert J. Carbaugh
9th Edition
Chapter 4:
Trade Model Extensions and Applications
Carbaugh, Chap. 4
Factor endowment theory (Heckscher-Ohlin)
Comparative advantage is explained entirely by different national supply conditions, especially resource endowments
Nations export products that use inputs which are relatively abundant (cheap) at home, and import products which need inputs which are relatively scarce (expensive) at home
Why relative price differentials?
Carbaugh, Chap. 4
Factor endowment theory: assumptions
Nations all have the same tastes and preferences (same indifference curves)
They use factor inputs which are of uniform quality
They all use the same technology
Why relative price differentials?
Carbaugh, Chap. 4
Comparative advantage according to factor endowment theory
Factor endowment model
Autarky equilibrium
Carbaugh, Chap. 4
Comparative advantage according to factor endowment theory
Factor endowment model
Post-trade equilibrium
Carbaugh, Chap. 4
Factor endowment theory: implications
Factor price equalization
The shift within each nation towards use of cheaper factors, and away from expensive ones, leads to more equal factor prices (if factors are mobile)
Distribution of income
Trade changes domestic distribution of income as demand for different factors changes
Tests of factor endowment theory
Emphasize the importance of varieties of different factors (such as human capital) and accounting for changes in resource endowment; other explanations are also important
Factor endowment model
Carbaugh, Chap. 4
Does trade worsen inequality?
Trade theory suggests that countries with abundant skilled labor will import goods which are made with unskilled labor
Equilibrium wage ratios for skilled/unskilled labor are affected by trade and technology change, immigration, and education & training
Evidence suggests that trade contributes relatively little to wage inequality, compared to technological change and other factors; better education and training are potential solutions
Distribution of income
Carbaugh, Chap. 4
Economies of scale & specialization
Economies of scale provide incentives for specialization, since per unit costs go down as production increases
Trade provides a larger potential market for products, making higher production levels possible
Bringing theory closer to reality
Carbaugh, Chap. 4
Economies of scale as basis for trade
Economies of scale
Carbaugh, Chap. 4
Trade & specialization under decreasing costs
Economies of scale
Carbaugh, Chap. 4
Other extensions of the theory
Overlapping demands
Intra-industry trade
Product cycles
Dynamic comparative advantage - industrial policy
Bringing theory closer to reality
Carbaugh, Chap. 4
Trade & the environment
Environmental regulation can lead to a policy tradeoff
Increased costs can reduce comparative advantage of regulated industry
Public receives health and environmental benefits
Concern that polluting industries would move to poor countries with less regulation
But studies indicate that environmental rules have a small role in investment location decisions
Polluter-pays principle: incentive to find ways to reduce pollution at least cost
Bringing theory closer to reality
Carbaugh, Chap. 4
Trade effects of pollution-control regulations
Trade & the environment
Carbaugh, Chap. 4
Free trade under increasing costs
Transportation costs
No transportation costs
Carbaugh, Chap. 4
Free trade under increasing costs
Transportation costs
Transportation costs of $2000 per auto
Carbaugh, Chap. 4
Specific factor theory
Looks at the income distribution effects of trade in the short run, when some factor inputs are not mobile among sectors
Indicates that workers may be better or worse off, depending on preferences
Predicts that owners of factors used in export industries gain from trade, while owners of factors used in import-competing industries will lose from trade
Bringing theory closer to reality
Carbaugh, Chap. 4
Relative prices and the specific factor model
Bringing theory closer to reality
Carbaugh, Chap. 4
