*CHAPTER 4
(Core Chapter)
THE HECKSCHER-OHLIN AND OTHER TRADE THEORIES
OUTLINE
4.1 Introduction
4.2 Factor Endowments and the Heckscher-Ohlin Theory
4.3 The Formal Heckscher-Ohlin Model
Case Study 4-1 The Revealed Comparative Advantage of Various Countries and Regions
4.4 Factor-Price Equalization and Income Distribution
Case Study 4-2 Has International Trade Increased U.S. Wage Inequalities?
4.5 Empirical Tests of the Heckscher-Ohlin Theory
4.6 Economies of Scale and International Trade
Case Study 4-3 The New International Economies of Scale
4.7 Trade Based on Product Differentiation
Case Study 4-4 Growth of Intra-Industry Trade
4.8 Technological Gap and Product Cycle Models
Case Study 4-5: The United States as the Most Competitive Economy in the World
4.9 Transportation Costs and International Trade
4.10 Environmental Standards and International Trade
Appendix The Specific-Factors Model and Intra-Industry Trade Models
A4.1 The Specific-Factors Model
A4.2 A Model of Intra-Industry Trade
Key Terms
International
of
scale
economies prices
Relative
factor
products Heckscher–Ohlin (H–O) theory Differentiated
trade
Intra-industry
Heckscher–Ohlin
theorem
(H–O)
Factor-proportions or factor-endowment theory Technological gap model
cycle
model
Product
Factor–price equalization theorem
costs
Transportation
Stolper-Samuelson
theorem
model Nontraded goods and services Specific-factors
paradox Environmental standards
Leontief
Monopolistic
competition
scale
returns
Increasing
to
Lecture Guide
1. This is one of the most important and difficult chapters in the book. It is also a long chapter and
requires four lectures to cover adequately.
2. In the first lecture, I would cover sections 1-
3. Section 3 is one of the most important sections in
the book because it presents the H-O model. I would proceed slowly and carefully in explaining Figure 4.1 and compare it to the standard trade model of Figure 3.4.
3. In the second lecture, I would cover sections 4 and 5. Section 4 on the factor-price equalization
theorem and income distribution is a difficult section. Case Study 4-2 should be of great interest to the students and give rise to a great deal of class discussion.
4. In third lecture, I would cover sections sections 6-7, paying a great deal of attention to section 7
on trade in differentiated products.
5. In fourth lecture, I would cover the rest of the chapter.
Answers to Review Questions and Problems
1. a. The Heckscher–Ohlin (H-0) theorem postulates that a nation will export those commodi- ties whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodities whose production requires the intensive use
of the nation’s relatively scarce and expensive factor. In short, the relatively labor-rich
nation exports relatively labor-intensive commodities and imports the relatively
capital-intensive commodities.
b. Heckscher and Ohlin identify the relative difference in factor endowments among
nations as the basic determinant of comparative advantage and international trade.
c. The H-O Theory represent an extension of the standard trade model because it explains the basis for comparative advantage (classical economists, such as Ricardo had assumed it) and examines the effect of international trade on factor prices and income distribution (which classical economists had left unanswered).
2. See Figure 1 on the next page.
3. a. The factor–price equalization theorem postulates that international trade will bring about the equalization of the returns to homogeneous or identical factors across nations.
b. The Stopler-Samuelson theorem postulates that free international trade reduces the real
income of the nation’s relatively scarce factor and increases the real income of the nation’s relatively abundant factor.
