THE ISSUES

The Ricardian model presented in Chapter 3 served several important purposes. It provided an explanation for international differences in supply conditions, traced the roles of supply and demand conditions in determining trade patterns and distributing the gains from trade, and examined the wage–price adjustments needed to achieve equilibrium in international markets. But it shed less light on other important issues, and we need another model to study them:

• How differences in factor endowments contribute to differences in supply conditions.

• How these differences are reflected in factor and product prices.

• How trade affects factor prices and the income distribution.

The model presented in this chapter was developed by Eli Heckscher and Bertil Ohlin in the 1920s and was refined by many economists, including Paul Samuelson. To focus on the influence of factor supplies, it assumes that all countries have the same technologies, suppressing the differences in labor requirements that were the main cause of trade in the Ricardian model. The version we will study, moreover, rules out the influence of country size by assuming that there are no economies of scale, and it rules out the influence of demand conditions by assuming that consumers have identical tastes.

THE HECKSCHER–OHLIN THEOREM

The Heckscher–Ohlin approach to trade theory, also known as the factor-endowments approach, is based on two suppositions:

1. Goods differ in their factor requirements. Cars require more capital per worker than, say, furniture or cloth, and aircraft require more than cars. In other words, goods can be ranked by factor intensity.

2. […]