Heckscher-Ohlin Model Research Articles

KPO’s: India's Ascension to the Top of the World

In the global scenario, technological advances and the growth of the information industry provided new market opportunities. Since business processing at low levels, multinational companies have begun outsourcing value-added ways of outsourcing of business processes. This has created a new outsourcing pattern, Knowledge Process Outsourcing, KPO. This covers intellectual property, equity and finance research and research, analysis, business research and data processing etc. After performance in BPOs, India is now focusing on KPOs. It is estimated that this business would hire 250,000 people by 2010. This paper addresses questions concerning the outsourcing of knowledge processes in terms of the Hecksher Ohlin model. It examines new developments in India's KPO market. It provides an outlook on the benefits of India in KPO and its evolving economic prospects. It also underlines the problems facing the next KPO market. Implementation of policies on challenges is often debated.

Trade and credit reallocation: How banks help shape comparative advantage

AbstractInnovative production is driven by creative destruction. High turnover requires frequent reallocation of capital. Banks play a major role in capital reallocation by withdrawing funds from nonviable firms and redirecting credit to scale up the most productive firms. Structural parameters of the banking system thus affect a country’s comparative advantage in innovative sectors. Using a Heckscher–Ohlin model with banks, this paper shows how insolvency laws, investor protection, and bank capital regulation shape reallocation, specialization, and trade patterns.

A Gravity Model Analysis of the Impact On U.S.A.’s Involvement in NAFTA

The purpose of this paper is to empirically analyze the United States’ trade patterns in goods based on the gravity model and evaluate whether trade agreements such as the North American Free Trade Agreement (NAFTA) are in the best interest of the US economy. The Gravity Model, US-Canada empirical trade data, and US-Mexico data supports the theoretical model. While it’s hard to incorporate all the factors into the assumptions in estimating the trade among NAFTA, the econometric model proved that there is some positive impact in terms of increasing the overall goods trading volume as a result of the United States implementing NAFTA in the early 1990s. However, it is hard to evaluate the overall benefits due to the limitations of the model such as small sample sizes and few independent variables. The Ricardian model and the Heckscher-Ohlin model are used to provide theoretical grounds.

The Labour Market Effects of International Trade in the Presence of Vertical Product Differentiation: Some Methodological Remarks in Retrospect

The paper retrospectively analyses the issue of the impact of international trade on developed countries’ labour markets in the 1990s, when the majority of academic opinion denied the role of trade in the misfortunes of unskilled workers. An analytical framework is proposed in which intra-industry trade is explained in terms of countries’ factor endowments and factor intensities of goods. Unlike the traditional Heckscher–Ohlin model of inter-industry trade, the model suggested here is more consistent with stylised facts about North–South trade. The paper also proposes a method for empirically assessing factor substitution effects at the product level. Inferring the factor content of intra-industry trade from the inter-sectoral relationship between factor intensity and average unit values of exports, the paper found that the labour market effects of intra-industry trade add significantly to the estimated factor market impact of trade.

Trade reforms and current account imbalances

This paper studies the effects of trade liberalization on capital flows in a dynamic Heckscher-Ohlin model and makes four contributions. First, we identify an interest rate over-determination problem in such a model, and solve it with an endogenous discount factor. Second, we show that a trade liberalization in a developing country generally leads to a greater current account surplus, which is the exact opposite of a common but partial equilibrium intuition. Third, factor market reforms reinforce the effect of the trade liberalization on capital outflows. Finally, our calibrations suggest that China's accession to the WTO is likely an important factor driving the rise of current account surplus during 2001–2010.

Unemployment effects of trade with a low‐wage country: A minimum‐wage model with sector‐specific factors

AbstractContrary to conventional wisdom, this paper shows that a high‐wage economy can paradoxically reduce its level of aggregate unemployment by engaging in international trade with a low‐wage country. We demonstrate this possibility after introducing a minimum wage into the basic specific‐factor model (with immobile capital and mobile labor), even though the opposite result is known to arise in the longer‐run framework of the standard Heckscher–Ohlin–Samuelson model (with both inputs mobile). Our result provides a cautionary note for public‐policy discussions that promote trade barriers as a way to reduce unemployment.

Labor Market Effects of Trade Induced Technological Change Under Intellectual Property Rights Protection

In this paper I examine the impact of trade liberalization on labor market outcomes using a model with high- and low-skilled workers and intellectual property rights (IPR) protection. I argue that IPR protection is crucial to determine labor market effects of trade liberalization in skill-abundant countries. With IPR protection R&D firms fully internalize the greater market size for their innovation. This leads to low-skill-biased technological change countervailing the negative labor market effects of relative price changes in a Heckscher-Ohlin trade model (Stolper-Samuleson theorem). To solve the general equilibrium model I calibrate it to match the US labor market between 2008 and 2014. I demonstrate that IPR protection cushions the negative price effects of trade liberalization, i.e., the wage gap does not increase as much, all workers face lower unemployment rates and higher wages. Without IPR protection the wages for low skilled workers would decline and their unemployment rate increases after trade liberalization. Moreover, I use CPS (current population survey) data to empirically confirm the model predictions.

Quantitative dynamics of intra-BRICS trade

The study uses an augmented gravity model to analyse intra-BRICS trade flows and the potential for establishing economic cooperation. It examines trade relations between BRICS with the help of the gravity model of international trade. Panel data from 2000 to 2017 were reviewed for bloc analysis of 20 trade partners. The analysis of the intra-BRICS trade flows is based on the Heckscher-Ohlin model. The results obtained confirm that the intra-BRICS trade relations have a sound positive impact on economic performance in these countries. Market size and economic index have a beneficial effect on the intra-BRICS trade flows. Market size is very elastic to trade, while trade tariffs and taxes within BRICS are manageable. Hence, the intra-BRICS trade has the potential to create strong economic ties within the member countries, and cooperation between the BRICS countries can have a significant influence on the globalisation of the world economy.

Progressive Income Tax and Comparative Advantage in Trade

We show in the world trade data that countries with more progressive personal income tax system are less likely to have comparative advantage in industries that employ a greater share of high-income occupations, such as high-tech industries and professional services. Moreover, when countries increase their income tax progressiveness over time, they lose comparative advantage in sectors that use high-paying occupations intensively. We propose two theoretical mechanisms to explain these empirical observations: one is the occupational choice model based on the trade-off between the wage and leisure in the Heckscher-Ohlin framework; the other is the Heckscher-Ohlin model with international immigration of high income workers. Both models demonstrate that progressive income tax pushes workers away from high-income occupations and undermines the comparative advantage in industries that rely heavily on these occupations. Policy makers need to consider the side effect of income tax on industry competitiveness in the global market when fighting inequality.

Optimal trade policy, equilibrium unemployment, and labor market inefficiency

AbstractUnder which circumstances is using trade policies to prevent job losses welfare improving? To answer this question, I incorporate a frictional labor market into the Heckscher–Ohlin model. The results suggest that (a) a country that has an inefficient level of unemployment may experience welfare losses from free trade; (b) having search‐generated unemployment is not sufficient to justify a use of trade policy, because free trade is still optimal when the labor market is constrained‐efficient; and (c) a small country that has an inefficient level of unemployment can use trade policy to improve its welfare.

A Theoretical Note on Sector-specific FDI Inflow in Developing Economies and the Real Exchange Rate

Using a hybrid of the Heckscher–Ohlin model and specific factor model of trade, this article considers the phenomenon of FDI inflows only in the exportable sector of developing economies. We investigate the impact of such capital flow on factor prices and the real exchange rate (RER) in the host country. Our results indicate that the exportable production expands while both the non-traded good production and the return to the factor specific to the non-traded good decrease, consequent upon an inflow of capital specific to the exportable sector. The effect of such inflow of foreign capital on the RER is unambiguous and it increases. JEL Codes: F1, F21, F31

International Trade Policy Preferences: The Impact of Patriotism and Nationalism Pre- and Post-9/11

This paper provides new evidence supporting the hypothesis that patriotism and nationalism influence personal trade policy preferences in addition to the typical economic determinants. It also examines the interaction of the 9/11 terrorist attacks along with patriotism and nationalism on policy preferences. Using the Heckscher-Ohlin model as a theoretical framework, ordered probit estimations were applied to survey responses from an International Social Survey Program survey question about preferences towards limiting imports. Extensions of the model were sequentially estimated to investigate the impact of national identity on policy preferences. The model was augmented to test how feelings of nationalism and patriotism influenced personal trade policy preferences. Data from the International Social Survey Program surveys administered in 1995/1996 and 2003/2004 also allowed us to reflect on the impact of the 9/11 terrorist attacks on trade preferences in the U.S. We found that prior to the 9/11 attacks, nationalism was associated with increased inclinations towards limiting imports while patriotism had no statistically significant impact on trade preferences. The 9/11 attacks made U.S. survey respondents less open to imports. Further, the 9/11 attacks served to reduce the impact of nationalism on the tendency to limit imports while it enhanced the desire to do so through patriotism.

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 x 2 x 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.

FACTORS PROPORTION IN TRADE PATTERN AND INTERNATIONAL CAPITAL FLOWS INTERACTION IN ASEAN+4 COUNTRIES

The classic thesis by Mundell, with the modification of Heckscher-Ohlin model, stated that a substitution relation flows between trade and international capital. Mundell showed that the equilibrium price of a commodity can be obtained through international factor mobility in the absence of trade in goods or vice versa, if the trade barriers of the factor price equilibrium are eliminated. Therefore, the factor price equalization will be achieved without requiring the exchange of goods between countries. Consequently, the study of international trading and capital flows is more frequently studied separately. However, empirical data have shown the contradictory phenomena in which both of them are interrelated and complementary, but how the two interact is still relatively rarely observed.Some constructions of new theories indicate that interactions between them can be studied through several channels; one of them is through the change in comparative advantage. This paper tries to analyze the interaction between trade and international capital flows in ASEAN countries + 4 (ASEAN plus India, China, Japan, and Korea). The countries included in this group are important players in international trading and represent the world's largest trading integration. The interaction between trade and international capital flows is linked via change of trading structure, as seen from the intensity of the use of production factors in the industry in each country. The results of the study are consistent with the theory that capital will flow to countries that have a capital-intensive industrial structure. This then leads to an increase in the deficit in the country?s current account balance.

Factor Abundance and Export Competitiveness: Hecksher-Ohlin (H-O) Theorem for Philippines and Japan Trade

This paper empirically examined the validity of Hecksher-Ohlin theorem in the context of the Philippine-Japan inter-industry trade. Specifically, this study tried to validate whether Japan and the Philippines are primarily exporting their relatively abundant factor and importing their scarce inputs as predicted by the H-O theorem. The question of whether factor abundance affects specialization of export trade was also addressed in this study. This study employed the Leontief’s test for H-O theorem with the addition of multiple regression time-series analysis for further validation of the test. Based on the data collected, with actual counts of the labor force in total and disaggregated, it is found that Japan relatively has an abundance of labor than the Philippines. Arguably, using the measurement of factor abundance established by Leontief and other researchers (share of supply of effective factor/share of world GDP), the result show that Japan is scarce in labor, which the Philippines is abundant. This result validates the assumption that the Philippines, as a labor abundant country relative to Japan, can export labor intensive products. In contrast, because Japan is found in this study to be a capital abundant country relative to Philippines, can export capital intensive products. Trading of these two countries using their abundant factor endowment likely provides competitive price in the international market hence could lead to export competitiveness. Furthermore, results from the Vector Error Correction Model (VECM) suggest that there is a long-run causality running from the Philippines’ labor supply and capital supply to its capacity to export merchandise products to Japan, hence enhancing efficiency on the utilization of these factor endowments could significantly improve export performance of the country that will ultimately achieve continuous increase in economic growth for the Philippines.

Impact of globalization on income inequality in Asian emerging economies

PurposeThe purpose of this paper is to examine the impact of three modes of globalization, i.e. trade globalization, financial globalization and technological globalization, separately on income inequality on the Asian emerging economies.Design/methodology/approachThe study uses Hecksher–Ohlin and the Stolper–Samuelson theorem as a theoretical model for the relationship between globalization and income inequality. The study uses pooled least square (POLS) and instrumental variable least square (IVLS) estimation technique but prefers the IVLS over POLS due to the problems of omitted variable biased and endogeneity. Due to unavailability of data for all the Asian emerging economies, the study uses the following 11 countries, i.e. Bangladesh, China, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Singapore, South Korea and Thailand, from 1980 to 2014 for the trade and technological globalization model and from 1990 to 2014 for the financial globalization model.FindingsTrade globalization significantly contributes to reduce income inequality in the Asian emerging economies. The impact of financial globalization on income inequality suggests that financial integration causes an increase in income inequality. Therefore, the benefits of financial globalization are not evenly distributed among the rich and the poor. The impact of technological globalization significantly contributes in the reduction of income inequality.Practical implicationsGovernment has to invest in research and development activities, establish efficient financial system, reduce trade restrictions and provide subsidies that help to increase the volume of trade.Originality/valueThis study contributes in the existing literature by analyzing the impact of trade globalization, financial globalization and technological globalization on income inequality in Asian emerging economies. The study provides useful guidelines to policy makers and governments to make effective policies in relation to globalization and income inequality that lead toward economic growth and reducing income inequality.

TRADE LIBERALIZATION: THEORY, PREDICTING THE CONSEQUENCES OF IMPLEMENTATION AND PRACTICAL REALITIES

TRADE LIBERALIZATION: THEORY, PREDICTING THE CONSEQUENCES OF IMPLEMENTATION AND PRACTICAL REALITIES

Winners or losers? Workers in transition economies under globalisation

ABSTRACT The objective of this study is to investigate if workers in transition economies have been winners or losers of globalisation. We base our key argument on the postulates of the Heckscher–Ohlin model, whereby countries benefit from the production and export of the good produced with the abundant factor of production. We analyse the period 1996–2016 in 25 transition economies of Central, Southeast Europe and the Commonwealth of Independent States. Globalisation is represented through the manufacturing export and FDI in GDP and is argued to be endogenous, at least partially, to workers’ conditions. Political stability and rule of law are used as exclusion restrictions. We rely on the conditional mixed process procedure to estimate the coefficients. Results suggest that workers in Central European transition economies are the winners of globalisation as it created mainly high-skill and well-paid jobs. Workers in the Commonwealth of Independent States are the losers of globalisation which likely happened through reducing wages, offering inadequate working conditions and dampening marketplace bargaining power. Finally, workers in Southeast Europe stand in the middle: they are winners as globalisation created expanded economic opportunities for them, but losers in the sense of workplace structure and wages.

The manufacturing comparative advantages of late-Victorian Britain

This article constructs indicators of revealed comparative advantage for 18 British manufacturing industries for the years 1880, 1890, and 1900. These indicators constitute the earliest systematic measurements of the relative performance of British industries. The indicators are then employed in a four-factor Heckscher–Ohlin model of trade, with the factors being capital, labour, material inputs, and human capital. Contrary to the previous literature, the manufacturing comparative advantages of late-Victorian Britain were not in the relatively labour-intensive industries. By 1890, there was a distinctly labour-economizing regime within British manufacturing. Contributing to this pattern of within-sector specialization were emigration from Britain and the full absorption of displaced agricultural labour into the manufacturing sector. This article concludes with the suggestion that, in the late-Victorian era, British and American manufacturing were not so dissimilar, at least relative to Continental manufacturing.

Phases of Globalization, Wages and Inequality

To analyse the globalization-wages-inequality relationship, we extend the North-South Heckscher-Ohlin-Samuelson (HOS) model by assuming (i) that the size of the South (emerging countries) increases over time, (ii) that the North (advanced countries) and the South have very different factor endowments, (iii) several northern and southern countries with different skill endowments, and (iv) North-South technological differences, productivity catching up and technological transfers. The model generates three phases of globalization, corresponding to different production patterns and to specific changes in inequality in the North and in the South. In the North, inequality continuously increases and unskilled workers purchasing power continuously decreases during the first phase of globalization, and inequality diverges across countries. In the South, very different profiles in terms of inequality dynamics are possible, depending on the country’s skill endowment and on the its technological gap with the North. Unlike the traditional North-South HOS approach, the model’s predictions fit with observed facts.