Heckscher-Ohlin Model Research Articles

New trade theory converges to the old trade theory—An elementary theoretical perspective

AbstractWe introduce factor specificity to reflect the cost of adjustment of reallocating factors between technologies that determine fixed costs and variable costs in a typical Dixit–Stiglitz–Krugman (DSK) model of trade, retaining all other standard specifications of such a framework. We show that such an apparently benign change fundamentally alters the results of the DSK model. The number of varieties and output per variety depends entirely on full employment conditions. Thus, DSK and Heckscher–Ohlin–Samuelson (HOS) models, which represent the major workhorses of old trade theory, converge in the sense that now the number of varieties and outputs per variety are completely determined by factor endowments.

Study on Economic Convergence Employing the 2.2.2 Model of Heckscher-Ohlin

This article presents a methodology to estimate disparities in factor endowments in a dynamic Heckscher-Ohlin model. The model integrates a static approach to intraindustry trade of two goods and two factors. By employing a Cobb-Douglas production function model (2 goods, 2 factors), we identify convergences and divergences in production, influenced by the elasticity of substitution between inputs. Our findings illustrate that, even if factor prices equalize, countries differing only in their initial capital-to-labor ratios may converge or diverge in income levels over time. Divergence can occur for parameter values that would imply convergence in a world of closed economies, and open ones. Received: 15 March 2024 / Accepted: 16 June 2024 / Published: 02 July 2024

Economic diplomacy: Analyzing theories and models for informed policy

This paper examines the intricate relationship between economic theories, trade policies, and diplomatic engagements in the context of international relations. Utilizing theoretical frameworks such as the theory of comparative advantage and the Heckscher-Ohlin model, we analyze the foundational principles guiding global trade and policy-making. We explore the role of probabilistic models, including Bayesian statistics and regression analysis, in forecasting economic trends and their implications for international relations. Furthermore, we investigate the impact of trade policies, including tariffs, non-tariff barriers, and global trade agreements, on economic dynamics and diplomatic interactions. Through case studies of economic sanctions, we assess the effectiveness of sanctions as a diplomatic tool and propose policy recommendations for their optimal implementation. Our analysis highlights the complexity of economic diplomacy and underscores the importance of quantitative analysis in informing policy decisions and fostering international cooperation.

Differences in Total Factor Productivity and the Pattern of International Trade

In this work, we develop a trade model that explains the pattern of trade between countries based on differences in total factor productivity (TFP) while also accounting for differences in relative factor endowments. The novelty stems from the introduction of production functions derived by combining the Ricardian and Heckscher–Ohlin–Samuelson (H-O-S) theories, with TFP differences serving as the basis of comparative advantage. To this end, a testable hypothesis is derived. For the empirical measurement of the TFP in each industry and country, a constant elasticity of substitution (CES)-type production function was employed, and the TFP was calculated as the Solow residual from the production function’s fixed term. To offer a better understanding, the model was tested for the bilateral trade between Germany and Russia, and Germany and the Czech Republic. It was found that TFP differences can be used as a basis for explaining comparative advantages and, consequently, the bilateral pattern of trade between two countries.

International Trade Agreements and Livestock Industries

Purpose: The general objective of the study was to explore international trade agreements and livestock industries.
 Methodology: The study adopted a desktop research methodology. Desk research refers to secondary data or that which can be collected without fieldwork. Desk research is basically involved in collecting data from existing resources hence it is often considered a low cost technique as compared to field research, as the main cost is involved in executive’s time, telephone charges and directories. Thus, the study relied on already published studies, reports and statistics. This secondary data was easily accessed through the online journals and library.
 Findings: The findings reveal that there exists a contextual and methodological gap relating to food safety regulations. The relationship between international trade agreements and livestock industries is complex, offering both opportunities and challenges. While these agreements facilitate market access and competitiveness for livestock producers, they also pose risks such as increased competition from foreign imports and environmental sustainability concerns. The effectiveness of trade agreements in promoting sustainable growth hinges on aligning trade objectives with broader policy goals, including food security and social welfare. Policymakers must strike a balance between promoting trade liberalization and safeguarding domestic interests, considering the diverse impacts on stakeholders. Moving forward, there is a need for greater coherence between trade policies and development objectives, emphasizing inclusive growth and cooperation to ensure the sustainable development of livestock industries globally.
 Unique Contribution to Theory, Practice and Policy: Comparative Advantage theory, Heckscher-Ohlin model and New Trade theory may be used to anchor future studies on international trade agreements and livestock industries. The study yielded several key recommendations. These included enhancing the harmonization of sanitary and phytosanitary standards, promoting mutual recognition of regulatory measures, investing in infrastructure and capacity building, facilitating market access and diversification, promoting sustainable production practices, strengthening monitoring and evaluation mechanisms, and promoting inclusive and participatory decision-making processes. These recommendations aimed to improve market access, ensure compliance with trade commitments, enhance sustainability, and foster inclusive development in the livestock sector.

The Heckscher-Ohlin Model in Modern International Trade

The Heckscher-Ohlin model, initially developed by Elie Heckscher and Bertil Ohlin, remains a cornerstone of international economics. This paper evaluates the model's relevance in the context of contemporary global trade dynamics, with a specific focus on how changes in relative factor abundance among countries continue to influence long-term trade patterns. By combining historical perspectives with modern insights, this study seeks to provide a comprehensive understanding of the model's applicability in today's interconnected world. While empirical research continues to validate its core principles, the study also acknowledges the complexities of real-world trade, including technological advancements, trade policies, and non-homogeneous factors of production. In conclusion, the Heckscher-Ohlin model remains an invaluable tool for understanding international trade, but its effective application requires an integrated approach that considers the multifaceted nature of today's global economy, guiding policymakers and businesses in navigating the evolving landscape of international trade.

Do Larger Economies Trade More? Evidence from India

International trade contributes significantly to a country’s economic growth at various stages of a nation’s development. Trade promotes competition and results in a more efficient allocation of resources and, hence, higher efficiency. Trade also encourages technological progress, technology transfer across countries, and development of new products, to name a few. This paper has two objectives- 1) To examine various trade theories on how trade impacts an economy’s growth, and 2) To analyse the trade data for India’s leading trading partner countries, and examine consistency of such data with predictions of the “Gravity model of trade”. Various trade theories are explained – the “Ricardian model of trade” (19th century) also known as the “Comparative Advantage Theory”, “Heckscher-Ohlin Model” (1920’s), also called the “Factor Proportions Theory”, “New Trade Theory” (NTT) by Paul Krugman (1979), “New-New Trade Theory” by Melitz (2003) and the “Gravity model of trade” by Tinbergen (1962). The predictions of the “Gravity model of trade” are tested for India using the 2021 data of the country’s leading export and import partners. The data shows the top three trading partner countries for India are the US, the UAE and China. These countries are large economies and hence consistent with the predictions of the Gravity model. Bangladesh is India’s 4th largest exporting partner – which is explained by the historically close cultural ties between India and Bangladesh facilitated by common language and borders. Overall, we can say that India’s trade data is consistent with the predictions of the Gravity model. India trades more with larger economies and those countries that are in close proximity in terms of cultural ties and distance.

Impact of the Sino-US Trade War on Factor Endowment in the China's GBA: A Theoretical Analysis from the Perspective of Factor Endowment Theory

Since the Sino-US trade war began in 2018, the two countries and other trading partners have been greatly affected. China's regional economic development has been affected by trade barriers, among which the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) is more serious. On the premise that factor endowments determine trade has been proven, this study puts forward the potential impact mechanism of trade on regional factor endowments and takes GBA as an example for theoretical analysis based on factor endowment theory. The results show that due to the decrease in GBA export demand, the labor endowment will decline, the capital endowment will change oppositely to the labor due to the substitution effect and innovation pressure, and the land endowment will decline steadily. However, the movement of factors of production is limited by trade deflection and the restrictive policy. Future mathematical induction based on Heckscher-Ohlin model is needed to prove the results, and the corresponding empirical analysis will verify the relevance and implication.

Revisiting India’s Export Potential: Modern Gravity Model Approach

The high contribution of India’s exports to its gross domestic product underscores the vulnerability of macroeconomic shocks like the COVID-19 in terms of losses in export revenues, increased cost of import and slowdown in growth. The scale of impact also depends on the degree of trade concentration, geographical expansion, export potential and strategic relationship of a country with its trading partners. This article aims to examine these factors using the modern gravity model approach. It also intends to analyse the export intensity and export potential of India with its 25 major trading partners. The results are estimated by using the Poisson pseudo-maximum likelihood method for the period 1991–2020. The results show that the exports between two nations are remarkably impacted by the trade cost and combined economic size. Furthermore, variables like population and islands are introduced in the extended gravity model, which positively impacts India’s exports. The direction of India’s exports witnessed a reversal in trend towards the traditional export destinations in 2020 compared to emerging countries from 2010 onwards. The export potential index also explains that India has the scope to enhance the export potential with developed nations as advocated by the Heckscher–Ohlin model. JEL Codes: F14, F49

ANALISIS PENGARUH PENGANGGURAN, FOREIGN DIRECT INVESMENT (FDI) DAN MANUFAKTUR TERHADAP PERTUMBUHAN EKONOMI DI INDONESIA (PERIODE TAHUN 2016-2021)

Several economic theories can explain economic growth, but what is popular to explain the relevance of the relationship between economic growth, Foreign Direct Investment, Manufacturing and Unemployment is the neoclassical theory where capital flows "downhill" from rich countries (capital abundance) to poor countries (capital scarce). So that all countries can access the same technology and produce similar goods, while the difference in per capita income reflects the difference in the rate of return on capital, new investment will be made in poor countries. On the other hand, the Heckscher-Ohlin model explicitly predicts capital flowing from countries with low interest rates to countries with high interest rates (Pogoda, 2012).
 After the 1997-1998 economic crisis, in 1999 Indonesia became a member of the G-20 making it a middle income country. More than two decades, Indonesia is in the middle income trap. Within the limits of this study, data were taken for 2016 – 2021, where foreign direct investment, manufacturing and unemployment had an effect on economic growth in Indonesia. As quoted in the World Bank report, Indonesia's per capita income was recorded at US$3,870 in the 2020 World Bank report, making it a lower middle income country. However, in 2021, in a World Bank report, Indonesia's per capita income recorded US$4,140, returning to the upper middle income country class.

Парадокс Леонтьєва: використання в умовах повоєнної економки

The Heckscher-Ohlin-Samuelson model provides a mathematical proof of the possibility of equalizing relative and absolute prices of production factors due to international trade, provided certain assumptions are met. Wassily Leontief proved, in practice these assumptions are not followed. Therefore, there is a need to adjust the parameters of the model in the calculations of indicators of value estimation and the use of production factors. The purpose of this research is to study the results of calculating the parameters of Leontief's statistics and to identify their potential application in the conditions of post-war economic recovery of Ukraine. The main research methods were theoretical generalization, economic-statistical analysis, and multivariate linear regression. During the research process, several partial tasks were completed, namely: 1) systematizing the results of empirical tests of the provisions of the Heckscher-Ohlin model in terms of explanations of the reasons for non-compliance with its individual conditions; 2) summarizing the combinations of indicators for the evaluation of parameters of production factors and verifying their relevance to individual tasks of factor testing; 3) formulating recommendations for the application of the Leontief’s statistics in the conditions of the post-war economic recovery of Ukraine. All partial explanations of the Leontief’s paradox can be used to modify the principles of calculating the indicators of production factors. Most often, there is a need to correct the following elements of statistical data: changes in the structure of the economy during the crisis period and as a result of military operations; taking into account the heterogeneity of labor and the need for financing education and training of specialists; different productivity of technologies used in the production of similar goods; the impact of the import tariff and its differentiation by product groups and geographical features; import of capital-intensive raw materials for production of labor-intensive products; use of various methods of factor intensity calculation. In addition to instrumental discrepancies and the imperfection of the calculation methodology, there is a problem with the very concept of representing the dependence of gross output on the structure of production factors. The classical Cobb-Douglas production function and its numerous modifications do not unambiguously solve the question of capital measurement. Moreover, the question of the primacy of the impact of consumption growth on output and the impact of output growth on consumption remains unresolved. The practical significance of the research lies in the fact that in the conditions of post-war economic recovery of Ukraine, most of the assumptions of the Heckscher-Ohlin model are nullified, as the state will have to introduce strict restrictions on the movement of production factors and international trade for some time. This will allow to form real statistics on the use of production factors and, on its basis, to carry out programming of Ukraine's international trade. On the basis of the Heckscher-Ohlin theory and Leontief’s statistics, it is possible to develop economic-mathematical models of the optimal distribution and effective use of production factors among industries. Based on the results of such modeling, a set of measures to restore the demographic potential should be developed in three areas: stimulating re-emigration, creating conditions for increasing the birth rate, and intensifying efforts to attract foreign labor. Attracting foreign capital will be possible if a favorable investment and tax climate is successfully created, corruption is overcome, and judicial reform is implemented. And technologies will come following investments. After the initial stage of economic recovery, programs of macroeconomic programming should be reviewed with a mix of emphasis on optimization of monetary and credit policies. And finally, after the economy recovers to at least the pre-war level, start creating conditions for the development of own technologies and reforming the education system.

The effect of changes in the terms of trade on GDP and welfare: A Divisia approach to the System of National Accounts

AbstractWhat effect, if any, do changes in the terms of trade have on the level of output (GDP) or welfare? I examine this issue through two versions of a textbook, Heckscher‐Ohlin‐Samuelson (HOS), two‐good model of a small, open economy. In the first version both goods are for final consumption. In the second, one good is an imported intermediate input into the other. In both versions, economic theory suggests that an improvement in the terms of trade raises welfare (consumption) but leaves aggregate output (GDP) unchanged. I then show that a national income accountant applying the principles of the 2008 System of National Accounts (SNA) would reach the same conclusions. This follows from a continuous‐time analysis using Divisia index numbers. However in the case where imports are intermediate inputs and competition is imperfect, an improvement in the terms of trade does raise GDP: the size of the effect depends on the size of the markup of price over marginal revenue. I argue that the continuous time Divisia approach is the right framework for national income accounting, even though it can only be implemented approximately in practice. If the aim is to find the best approximation to the Divisia index, then the chained Fisher index (as used in the US and Canadian national accounts) or the chained Törnqvist are better approximations than is the chained Laspeyres (as used in Europe).

Foreign Direct Investment in Neoclassical Theory of International Trade: A Conceptual Weak Spot

This article analyses the role of foreign direct investment (FDI) in neoclassical theory of trade with a focus on the relocation of production into low wage countries. The conceptual analysis shows that FDI not only constitutes a weak spot in comparative advantage theory, but also that the latter is incompatible with efficiency-seeking FDI—with significant implications for policy. In Ricardian and Heckscher-Ohlin models of trade, FDI is ruled out via the assumption of factor immobility. In models in which factor immobility is relaxed, the closest FDI comes to is a generic reference to capital imports and exports, which affect factor endowments and, therefore, comparative advantage. Due to the assumption that input factors are determined by wage-rental ratios, this leads to the condition that firms operating in advanced economies must produce more labor-intensively, if investing in facilities in low-wage countries. Efficiency and market-seeking FDI, which combines productive, capital-intensive modes of production with cheap labor to exploit unit labor cost differentials, is a theoretical and mathematical impossibility in this framework. This conceptual weakness questions the validity of conventional approaches to development policy, which largely rely on market liberalization and free capital mobility.

Testing Hecksher Ohlin Theory : Evidence From Singapore In 1991-2016

This research aims to test Hecksher Ohlin's theory with a capital-intensive country in Asia, namely Singapore with the research period 1991-2016. The time period was chosen to avoid a significant shock, namely the covid 19 that occurred in 2020. However, taking into account the effect of the Asian financial crisis in 1997, the 1991 - 2016 time period was chosen. The data used and obtained are from the World Bank. We examine the variables of labor, investment, consumer price index and export. This study uses VECM Modelling. According to Hecksher Ohlin's theory, a capital-intensive country like Singapore will export its goods and services which has a positive and significant relation with investment. The research's findings support the Hecksher-Ohlin Theory. However, employment is also positively related to investment in Singapore. This is very rational even though Singapore uses a capital-intensive system but still requires manpower. Likewise, the CPI is also significantly positive regarding investment in Singapore, proving that Singapore's production is not only for export orientation but also to meet domestic consumption.

The pattern of international trade between Bangladesh and USA: Heckscher–Ohlin and Rybczynski analysis

PurposeResearch based on Bangladesh–US trade data examines the Heckscher–Ohlin model and the Rybczynski hypothesis in this study.Design/methodology/approachOrdinary least square (OLS) techniques are used in this study, which relies on data from the NBER International Trade and Geography Data and the UN Comtrade Database for the years 2018 and 2008.FindingsThe research shows that trade between the United States and Bangladesh follows Heckscher–Ohlin and Rybcyzinski's trade predictions. According to the study, since labor is in plentiful supply in Bangladesh, Bangladesh's labor-based sectors have a higher US labor-to-capital import shares than US capital-based industries. As Bangladesh has not changed significantly from a labor-based country since 2008, it retains the same pattern even though the share of US unskilled labor-based sectors imported from Bangladesh decreased in 2018.Originality/valueThe findings of this study have a wide range of implications for both trade theory and policy debates between Bangladesh and the United States.

Is Holland a Lumpy Country? An application of the Lens-Condition to Dutch Cities

Traditional trade theory assumes that countries are dimensionless points. Recent research, however, shows that the internal geography of countries is important for the trade structure of a country. One aspect of internal geography is the uneven spatial distribution of factors of production, which especially concentrate in urban locations. The so-called lens-condition (based on the Heckscher-Ohlin model) tests whether the (urban) distribution of factors of production is uneven enough to affect the national structure of trade and welfare. Our analysis, using firm export data and applying the condition to 22 cities and 4 regions within The Netherlands for 2007–2017, shows that the condition is fulfilled. We explain why.

Comparative Advantage in (Non-)Routine Production

We illustrate a new source of comparative advantage that is generated by countries’ different ability to adjust to technological change. Our model introduces substitution of workers in codifiable (routine) tasks with more efficient machines, a process extensively documented in the labor literature, into a canonical 2 × 2 × 2 Heckscher-Ohlin model. Our key hypothesis is that labor reallocation across tasks is subject to frictions, the importance of which varies by country. The arrival of capital-augmenting innovations triggers the movement of workers out of routine tasks, and countries with low labor market frictions become relatively abundant in non-routine labor. In the new equilibrium, more flexible countries specialize in producing goods that use non-routine labor more intensively. We document empirically that the ranking of countries with respect to the routine intensity of their exports is strongly related to labor market institutions and to cultural norms that influence adjustment to technological change, such as risk aversion or long-term orientation. The explanatory power of this mechanism for trade flows is especially strong for intra-EU trade.

Do Imports Increase Unemployment? Empirical Estimates That Are Not Model Dependent

Some Ricardian models would predict a fall in unemployment with trade liberalization. In contrast, the Heckscher-Ohlin model (Stolper Samuelson Theorem) would predict trade liberalization would cause a fall in wages for labor scarce countries, resulting in greater unemployment if there are wage rigidities. The choice of which theoretical model is used affects the empirical results obtained. This paper produces estimates of the change in unemployment due to a change in imports that are not model dependent. The estimates produced are total derivatives that capture all the ways that imports and unemployment are correlated. I find that unemployment increases with increased imports for Austria, Greece, Japan, Portugal, South Korea, Slovenia, and Sweden, but that unemployment decreases with increased imports for Australia, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Israel, Italy, Latvia, the Netherlands, New Zealand, Norway, Poland, Slovakia, Spain, the UK, and the US.

El comercio internacional de armamento y las ventajas comparativas

In this paper we try to explain how well trading models in general can be used for international arms trading. We will study the evolution of the main models throughout history in order to see in what ways they may be adequate to explain the security and defence material trading, mainly we will focus in the Heckscher-Ohlin model. In order to understand military equipment trading, we are going to analyze the industry’s composition, studying the cases of the main exporters and importers, and what motivates them to go one step further from the mere production of Goods, towards international trading, while taking into consideration the main ways of exporting a product and the regulations it may face.

The political economy of trade and international labour mobility

AbstractWe explore the political economy of trade and migration policies in several models of international trade. We show that in a Ricardian world, free trade and no international labour mobility is a Nash equilibrium outcome, but free trade and free international labour mobility is not. The result holds under different assumptions about the set of goods, preferences and the number of countries. An analogous result also holds in multifactor economies such as a version of the standard two‐sector Heckscher–Ohlin model, the Ricardo–Vinner specific factors model and a three‐sector model with a non‐tradeable sector. We also study several extensions of our model in which free trade and at least partial labour mobility is a Nash equilibrium outcome. One extension introduces increasing returns to scale. Another an extractive elite. Finally, we allow the recipient country to charge an immigration fee in the form of an income tax and distribute the proceeds among domestic workers, which induces a Pareto improvement for the global economy.