Patterns of Trade and Growth across Cones

Abstract

This paper examines the implications of the Heckscher-Ohlin (HO) Model for the patterns of production and trade that will emerge as a country grows. It focuses primarily on world equilibria that include two or more cones of diversification. Starting with the textbook model of two factors and two goods, growth paths for production and trade are derived in terms of a country's capital-labor ratio relative to that of the world. With additional goods and countries, multiple cones create a ladder of comparative advantage that a country will climb as it accumulates capital relative to the world. With additional factors as well, more complicated patterns can emerge. In a three-factor model based on Krueger (1977), a country with fixed land, growing labor, and faster growing capital can first work its way down the ladder of comparative advantage before climbing back up. Using a graphical representation due to Leamer (1987) of a more general three-factor model, cones of diversification with large numbers of goods take the form of polygons that a growing country may pass through, then cross between. In all cases, the lesson of the HO Model is that growth causes repeated and extreme changes in patterns of specialization and trade over time.