Heckscher-Ohlin Model Research Articles

Do Free Trade Agreements Affect Income Inequality?: An Empirical Investigation

The number of preferential trade agreements through FTAs between countries and groups of countries has greatly increased during the last two decades. Despite numerous studies on the effect of trade on income inequality since the Hecksher-Ohlin model and the Stolper-Samuelson theorem, a possible linkage between FTA and income inequality has received little attention and had not been studied thoroughly. This study examines the effect of international trade through FTA on intra-national inequality of income. The empirical linkage between FTA and income inequality measured by the Gini index is investigated by estimating a series of augmented income inequality regressions using a data set of 132 countries. Main findings from the estimation show strong evidence for the impact of FTA on income inequality. There is a strong linkage between the number of FTA notifications to WTO and income inequality. However, overall trade openness is not found to affect income inequality. The effect differs between goods notification and services notification within FTAs: the higher goods notifications bring a reduction in income inequality, while the higher services notifications raise income inequality.

The Heckscher-Ohlin Model and the Performance of Cocoa Products in Nigeria

The Heckscher‑Ohlin model based on Ricardo’s theory of comparative advantage maintains that countries should specialize in the production and exportation of products that they have relative factor endowments. Therefore, Nigeria has taken advantage of its favourable climatic condition to become among the largest producers and exporters of cocoa products in the world. Given that cocoa is also the topmost non-oil export product and earnings in Nigeria, this paper assesses its performance and determines the effects of external factors on production in the country. Nigeria’s performance in the global cocoa market has been somewhat below expectations. Using OLS and Granger causality, the OLS regression results reveal that exports, trade openness, area harvested and domestic consumption have a positive influence on cocoa production in Nigeria. The Granger test shows that there exists bidirectional causality between the world price, trade openness and yield per hectare to cocoa production in the country. The results further confirmed a unidirectional causality running from cocoa output to exports. The government of Nigeria and trading partners should create a sound environment and some incentives to stimulate cocoa producers and exporters to increase production for export performance and revenue generation in the country.

Trade preferences and political equilibrium associated with trade liberalization

ABSTRACTThis paper, motivated by the so-called North–South problem in trade, analyzes ex ante trade preferences and the source of potential political conflicts regarding trade liberalization. Developing a dynamic extension of the traditional Heckscher–Ohlin model with imperfect labor mobility and tracking overall dynamic paths from the autarky to free-trade steady states, we demonstrate that in the presence of inter-sectoral migration barrier, bilateral free-trade agreements can be welcomed (opposed) by the majority of workers in a capital-abundant (labor-abundant) country, which is inconsistent with the welfare prediction by Stolper and Samuelson. This paper also proposes a numerical algorithm to solve for the entire transition path of the model under rational expectation. Our simulation experiments further reveal that preannounced and delayed implementation can facilitate a bilateral free-trade agreement by partially neutralizing short-run transitional gains and losses so as to persuade the losers to support the reform without affecting the beneficiaries’ trade preferences.

Optimal Trade Policy, Equilibrium Unemployment and Labor Market Inefficiency

Why do politicians advocate trade protections to save domestic jobs when neoclassical trade models suggest that small open economies should implement free trade? The novel insight of this paper is that trade protections can be rationalized as a second-best policy that improves the domestic welfare when the equilibrium unemployment is different from the constrain-efficient unemployment. To understand the puzzle, we incorporate a Diamond-Mortensen-Pissarides frictional labor market into the standard Heckscher-Ohlin model of international trade. The model offers various findings. First, when the relative price of the labor (capital)-intensive good increases, equilibrium unemployment decreases (increases). Second, the labor market in a competitive equilibrium is constrained-efficient when the Hosios condition is satisfied. Third, a capital-abundant country with inefficiently high unemployment may experience welfare losses from trade. Conditional on having the same observed trade share, a labor-abundant country with inefficiently high unemployment have an extra welfare gain from international trade that is not present in traditional models without equilibrium unemployment. Finally, when the la- bor market in a small open economy generates inefficiently high equilibrium unemployment, the optimal trade policy is to raise the domestic price of its labor-intensive goods (an import tariff in a capital-abundant country and an export subsidy in a labor-abundant country). Free trade is optimal only when a labor market is initially efficient. The model predictions are sup- ported by patterns of tariffs in WTO member countries.

Revisiting Leontief’s paradox

According to the popular Heckscher-Ohlin model of international trade, a country is expected to export (import) those products whose production requires the intensive use of the factor of production that is in relative abundance (scarcity). Leontief (1953), using input–output data of the US economy for the year 1947, found that the US, an overwhelmingly capital-abundant country, exported labour-intensive products and imported capital-intensive ones. Clearly, the results contradicted the predictions of the Heckscher-Ohlin model and they were characterised as ‘Leontief’s paradox’. A number of explanations for the so-called paradox were offered and this paper briefly, but critically, evaluates these explanations as it examines whether or not Leontief’s results persist in the case of the US economy during the period 1998–2012.

Time Preference and Income Convergence in a Dynamic Heckscher–Ohlin Model

AbstractThis paper shows that income convergence in an open‐economy setting hinges upon how the time discount rate of the households is determined. As opposed to the case of constant time discount rate where cross‐country income divergence may emerge, the small open economy may catch up with the rest of the world if the time discount rate increases with consumption. In contrast, if the time discount rate decreases with consumption, then the small open economy fails to catch up with the rest of the world under free trade of commodities.

Trade, overeducation, and wage inequality

Contrary to the predictions of the 2x2x2 Heckscher-Ohlin model, empirical evidence shows that trade openness causes the skill premium to increase in some developing countries and to decrease in others. This paper introduces a North-South setup, where the labor force is divided into skilled and unskilled workers. There are two types of firms: producers of final goods and producers of intermediate goods. There are two types of final goods: a complex good and a simple good. The former is produced utilizing skilled workers who completed their training, and a range of complex complementary intermediates. The latter is produced utilizing skilled workers who did not complete their training, unskilled workers, and a range of simple complementary intermediates. Complex and simple intermediates are produced by technology monopolists in the North, and used by producers of final goods both in the North and in the South. The results suggest that the skill premium increases in the North after trade liberalization if and only if the employment in the complex sector relative to the simple sector in the North is higher than that in the South. On the other hand, the effect of trade liberalization on the skill premium in the South depends on the level of overeducation. The skill premium is the ratio of the weighted average wage of all skilled workers to that of the unskilled workers. The wage of skilled workers is a weighted average of the wage of the skilled workers in the complex sector and in the simple sector. In the South, trade openness causes a decrease in the wage of the former and an increase in the wage of the latter. If the portion of the latter is higher than that of the former, the weighted average wage of skilled workers and the skill premium increase after trade liberalization. Otherwise, the skill premium declines. Therefore, the effect of trade liberalization on the skill premium in the South depends on the level of skill mismatch, or the portion of skilled workers in the simple sector. The empirical estimation using a threshold estimation technique provides evidence to support the theoretical findings.

O COMÉRCIO INTERNACIONAL DO CEARÁ (1997-2012) – UMA ANÁLISE A PARTIR DE HECKSCHER-OHLIN

O objetivo deste trabalho é avaliar se a mudança no uso dos recursos produtivos, expressa no fluxo internacional de bens do Ceará com o mundo, de 1997 a 2012, encontra-se de acordo com a Teoria da Dotação Relativa de Fatores, desenvolvida por Heckscher e Ohlin. Realizouse um teste empírico sob a ótica do modelo de Heckscher-Ohlin utilizando a técnica do insumo-produto e considerando três fatores de produção: trabalho, capital e recursos naturais, conforme a versão do modelo empregada por Hidalgo e Feistel (2006). Foram calculados os requisitos diretos e indiretos dos fatores de produção em cada setor e a classificação dos produtos segundo as intensidades de fatores com base no método dos Triângulos de Dotações. Os resultados revelaram que o Ceará apresenta grande parte das exportações intensivas em trabalho e as importações intensivas em capital, na maioria dos anos, corroborando as ideias de vantagens comparativas do modelo de Heckscher-Ohlin.

On Blending Competitive Trade Models

Three standard models typically discussed in the theory of international trade are the Ricardian model, the Heckscher–Ohlin model and the Specific-Factors model. Models are often compared with each other, in an attempt to analyze which model is best or fits reality better. Instead, I suggest that these international trade models can often be blended to take account of finite changes when, as a country develops, the appropriate model to be used changes as the pattern of production changes. Trade allows countries to produce fewer commodities than it consumes, and which commodities are selected to be produced may change as the economy grows in the size of its endowment bundle and/or technology changes. At issue is not only the question of which commodities are produced, but also how many commodities are produced, especially with reference to the number of productive factors.

What Determined the Location of Industry in Belgium, 1896–1961?

Belgium was one of the first continental countries to undergo industrialization and develop an extensive transportation infrastructure during the nineteenth century, completing the integration of its internal market by the early twentieth century. As such, the country is an ideal case study of the driving forces behind the decisions that industries made about where to locate. An analysis of factors embedded in both the Heckscher-Ohlin model and the new economic geography indicates that the main determinant of Belgium’s industrial locational pattern between 1896 and 1961 was proximity to regions with a high market potential.

The Economic Impact of Remittances and Foreign Trade on Migration. Granger-Causality approach

This paper analyzed the bidirectional relationship between several mobility factors such as migration, remittances and foreign trade. The issue that certain mobility factors might be substitutes was first raised by economists Heckscher and Ohlin and was later picked up several times by other authors in the literature. We assumed that such a debate should be revived and addressed again, especially having in mind growing importance of mobility factors in contemporaneous Economies. Using modern and sophisticated econometric technique such as Granger-causality analysis we studied the case of Spain taking yearly data from 1975 till 2013. The autoregression vector (VAR) model was used as well as Granger-causality test was employed to provide evidence that such a reciprocal type of relationships between the economic factors subject of our study in reality exist. The results of Granger-causality test have led us to the conclusion that export causes migration and also migration causes export. Results also showed that net migration and international trade are treated as substitutes. Further, we found that not only migration causes higher remittances what is consistent with an intuitive feel, but also past remittances draw further migration. In terms of the Heckscher-Ohlin model, the enormous growth of migration flows in the contemporary time is explained partly because the increase in remittances through the downtrend in their costs which has also encouraged to international trade.DOI: http://dx.doi.org/10.5755/j01.ee.26.4.12464

Corruption, Financial Resources and Exports

AbstractThis paper argues that a country's comparative advantage in exports depends on both the factor abundance and the allocation efficiency of the endowments. However, the latter is not considered in the traditional Heckscher–Ohlin model. In line with the “sand” view of corruption, this paper empirically studies the role of corruption in shaping a country's export pattern by distorting the allocation of financial resources. We find that the resource misallocation resulting from corruption undermines the export growth promoted by the positive external financial shock. The negative effects are realized by the extensive margins instead of the intensive margins of heterogeneous firms.

Comments by Shigeyuki Abe, on Global Value Chains and East Asian Trade in Value-Added

Shigeyuki Abe: This paper empirically analyzes global value chains (GVCs) in East Asia since the mid 1990s using the World Input Output Database. Estimations are carried out to identify the determinants of East Asian trade in value-added, incorporating the Heckscher-Ohlin model, the Ricardian model, and the gravity model. The empirical result reveals that world trade patterns can be better explained over time by capital–labor ratios and productivities. In the case of East Asia, high-skilled labor productivity has not contributed to the trade in value-added since the mid 2000s; instead, the importance of the distance variable has been rising significantly. East Asia has not been a technological innovator, meaning it has not fully benefitted from GVCs. Policy implications for Asian countries to follow include improving labor productivity, putting less importance on developing free trade agreements (FTAs), lowering tariffs further because of the acceleration of cross-border trade in intermediate goods promoted by GVCs, and keeping sufficient inventory to minimize the market risks.

Trading Tasks and Skill Premia

The 2x2x2 Heckscher-Ohlin model predicts that trade openness causes the skill premium to increase in the skill abundant developed countries, and to decrease in the skill scarce developing countries, after trade openness. Empirical evidence, however, shows that the skill premium declined in some developing countries, while others experienced an increase in wage inequality. This paper develops a North-South model, where firms produce a low-skilled and a high-skilled intensive good. The production of a unit of either good involves a continuum of L-tasks and H-tasks. The L-tasks can be performed by low-skilled workers only, and the H-tasks can be performed by high-skilled workers only. The Northern firms can produce the task in their headquarters, or offshore the task to the South. The results suggest there is a threshold skill abundance level in the South, above which countries experience an increase in the skill premium after an improvement in the offshoring technology, and below which countries experience a decrease in the skill premium. In this context, the North offshores the H-tasks to countries that are relatively more abundant in high-skilled labor, and L-tasks to countries that are relatively more abundant in low-skilled labor. Therefore, countries that become the hosts of L-tasks experience a decrease in the skill premium, because there will be higher demand for their low-skilled workers, while those that become the hosts of the H-tasks will experience an increase in the skill premium, because there will be higher demand for their high-skilled workers. This accounts for the asymmetric patterns of skill premia in the South.

Uncertain lifetimes and convergence in a two-country Heckscher–Ohlin model

In a two-country infinite-horizon model, with two traded goods and two factors of production and no international borrowing and lending, there is no convergence of incomes if there is factor-price equalization. With factor-price equalization, the Euler equations of the two economies become identical. I show that in such a set-up if agents have a non-zero probability of death, then we do get convergence. In the steady state the two economies have identical capital–labor ratios and revert to autarky.

Equilibrium Price and Generalized Stolper-Samuelson Theorem and Generalized Rybczynski Theorem

Both the Heckscher-Ohlin theorem and the factor price equalization theorem depend on or related to trade equilibriums. The trade equilibrium is the price equilibrium of production, consumption and trade. This study provides a price solution for the Heckscher-Ohlin model by using HOV assumption that consumption share is the GNP share. It also identifies the price solution set for all possible values of the consumption share and proves that there is a unique equilibrium price for a given consumption share. New trade effects, the generalized Rybczynski theorem and the generalized Stolper-Samuelson theorem, based on the terms of trade, are developed. And the study demonstrates that the equilibrium price is the best price for the abundant factor and the worst price for non-abundant factor for each country from the view of factor endowments. The study receives that with economic growth and the changes of factor endowments, the new price equilibrium will create new gains from trade. Overall, this paper studies economic interactions after trade; it is a rarely touched area of the H-O studies.

Technology Effects on Trade Virtual Factor Advantages by Technological Differences

This paper studies a 2x2x2 Ricardo-Heckscher-Ohlin Model (briefly R-H-O model) by introducing different technologies into the Heckscher-Ohlin model. The key tool of this study is presenting a solution of common commodity prices embedded with two sets of local factor prices for each countries, which is an endogenous prices fully determined by technological coefficients and by factor endowments. A virtual R-H-O system is built by extending Fisher (2010)’s concept of the virtual factor endowments. The virtual R-H-O system is a typical H-O model mathematically, so the major H-O theorems can be generalized into the virtual R-H-O model directly without much difficulty. The Heckscher-Ohlin theorem is generalized as the virtual Heckscher-Ohlin theorem in the R-H-O model, which says that a country will export the commodity that uses its virtual abundant factor intensively. The virtual factor price equalization theorem says that the factor price of a country will be equalized with the virtual factor price of its counterpart country. This means that two local (real) factor prices are non-equalization. The Rybczynski theorem is generalized to a comprehensive trade effects on the changes of local output, commodity price, and two local factor prices. One interesting result is that both countries, participated trade with different technologies, can even export same (kind of) factor content of trade and import the same (kind of) factor content of trade. It implies that the capital-labor ratio embodied in consumptions for both countries may excesses capital-labor ratio embodied in products, for some cases. It is odd to common understanding of factor content of trade by Leamer theorem (1980). This explores a new trade function – virtual factor advantage. Trade compensates the scarce resource worldwide by virtual factor endowments. The countries can produce or consume more when they trade with virtual factor advantage. The virtual advantage is sourced from technological differences and is realized by trade. It proves a new angle to think the “missing trade” and Leontief’s paradox, since the factor contents of trade are balanced by virtual factor contents, not by real factor content of trade.

Analysis of Composition of Workers in Indian Manufacturing Industries

The Hecksher Ohlin (H-O) theoretical arguments and their further implications drawn by the Stopler-Samuelson model argue that, based on factor cost advantages, the labour surplus developing economies would have comparative advantage in producing and exporting labour intensive products, while the capital abundant developed economies would have comparative advantage in producing and exporting capital intensive products. This in turn would generate demand for less skilled workers in the developing economy and that of more skilled workers in the developed economies. However, contrary to the H-O trade theoretic predictions of rising relative demand for sector specific unskilled or less skilled employment in developing economies, empirical evidence for India suggests a different picture across different industries in Indian manufacturing sector.

Neoclassical growth and the natural resource curse puzzle

We advance a novel mechanism that helps to explain the puzzling evidence on the natural resource curse. The new channel arises in a standard dynamic Heckscher–Ohlin model composed of small-open economies that take international output prices as given. Within this framework, a more capital-intensive primary sector implies that natural-resource abundant economies grow more slowly along the adjustment path. This effect might be only temporary because the natural input also affects long-run income, and not necessarily in the same direction as transitional growth. We produce quantitative results that show that the new mechanism can account for a significant fraction of the observed output growth gap between resource rich and resource poor U.S. states.

The Political Economy of Trade and International Labor Mobility

We 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 labor mobility is a Nash equilibrium outcome, but free trade and free international labor 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 three extensions of our model in which free trade and at least partial labor 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.