Question

Workers who immigrate to new countries, how does this affect the predictions of the Heckscher-Ohlin Model? How should this affect our thoughts about trade policy and immigration policy?

Answer 1

The Heckscher-Ohlin (HO) model
and the factor-proportions-analysis (FPA) model - as regards the impact of immigration on indi-
vidual utilities through factor markets. In terms of the distributional effect of immigration, the
interaction between individual factor type and each country’s factor endowments plays a key role in
both the HO model and the FPA model. Hence, I will refer to both as factor-endowments models.
The HO model is one of the workhorse theories of international trade. It focuses on small open
economies, characterized by constant returns to scale and perfect competition in each sector. At
least two goods are assumed to be produced, so that trade can take place between countries. In
addition, factors are perfectly mobile across sectors.
The key feature of the HO model is differences across economies in relative factor endowments.
Through trade, each country either exports or imports the services of a factor of production ac-
cording to whether it is abundantly or poorly endowed with it, relative to the rest of the world.
The predictions of the HO model, with regard to the impact of immigration on factor rates of
return, depend on a key condition that relates the number of internationally-traded goods produced
in the country (n) to the number of primary factors of production (m). If n ≥ m, ceteris paribus
a sufficiently small increase of a factor’s supply does not have any effect on factor rates of return:
factor-price-insensitivity holds.18 If the shock to the factor’s supply is substantial or if n<m,
a change in a factor endowment affects factor prices. Thus, in the HO model, the impact of
immigration on factors’ rates of return depends on the extent of diversification of the country’s
production, in terms of internationally-traded goods, and on the size of the factor supply shock.