A General Model of Comparative Advantage with Two Factors and a Continuum of Goods

Abstract

This paper develops a general model of comparative advantage with two factors and a continuum of goods, which incorporates the Ricardian and Heckscher-Ohlin-Samuelson models as two special cases, and which can illustrate how technology, factor endowments, world income, world prices and demand preferences influence trade pattern with a single graph. Further, we have derived an intuitive solution of a unique trade pattern under factor price equalization: countries specialize in goods that use intensively abundant factors, and some middle goods in terms of capital intensity are not traded even in the absence of trade barriers. In the trade literature, the Ricardian theory and the Heckscher-Ohlin-Samuelson (HOS) theory are usually taught with different tools. The objective of the present paper is to develop a general model that can substitute the standard 2 x 2 x 1 Ricardian model and the 2 x 2 x 2 HOS model. Our model has two countries, two factors, and a continuum of goods. The specification of a continuum of goods is a compact technique to study the general case in which there are more (greater than two) goods than factors. Specifically, we integrate Dornbusch, Fischer and Samuelson's two papers (1977 and 1980).2 In comparison with standard models, ours has two attractive properties. First, it provides a common structure to the Ricardian and HOS models. These two trade theories differ in the explanation for the source of comparative advantage. The Ricardian theory explains comparative advantage in terms of technological differences that vary from sector to sector3 whereas the HOS theory does in terms of factor endowments. In our model, both determinants of trade pattern can operate simultaneously. Second, this model highlights the trade pattern of specialization, which should be the logical prediction of trade theories of comparative advantage. While the Ricardian theory generally