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  • Print publication year: 2000
  • Online publication date: June 2012

5 - Factor Substitutiton and a Modified Ricardian Model

Summary

INTRODUCTION

Consumers gain from trade whenever supply conditions differ systematically from country to country. We have examined two trade models designed to account for those differences. The differences arise in the Ricardian model because technologies differ across countries. They arise in the Heckscher–Ohlin model because factor endowments differ across countries. The models are too simple to explain trade patterns fully, but they help us organize our thinking. Furthermore, the main hypotheses drawn from the models are partly verified by quantitative studies.

In the Ricardian and Heckscher–Ohlin models, trade affects the domestic economy profoundly. It alters the composition of output, the ways that factors of production are allocated across industries, and the real earnings of those factors. The effects on real earnings and the income distribution call for close attention, because they help us understand why governments frequently adopt trade policies that appear to ignore the teachings of trade theory.

This chapter and the next look more closely at the domestic effects of trade by relaxing the assumption used in Chapters 3 and 4, where factor requirements were rigidly fixed. That assumption influenced the shapes of transformation curves and the ways that trade affected outputs and earnings. In the Ricardian model, the transformation curve was a straight line, and one trading country had to specialize completely. In the Heckscher–Ohlin model, the transformation curve had two straight-line segments and a single full-employment point, and a country starting at that point might not specialize at all.