Question

Explain why the Heckscher-Ohlin model is consistent with low skilled workers wanting more trade barriers, while higher-skilled workers (where they are employed in industries more exposed to trade) are against.

Answer 1

Abstract

The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce.

It takes the position that countries should ideally export materials and resources of which they have an excess, while proportionately importing those resources they need

Meaning and Importance of Heckscher-Ohlin model

1. The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics.
2. The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce.
3. The model emphasizes the export of goods requiring factors of production that a country has in abundance.

B) Implications on trade barriers of the Heckscher-Ohlin Theorem.

1. In a perfectly competitive market, factors are paid on the basis of the value of their marginal productivity, which in turn depends on the output prices of the goods.
2. When prices differ between countries, so will their marginal productivity and hence so will their wages and rents.
3. As per this model once goods' prices are equalized, as they are in free trade, the value of marginal products is also equalized between countries and hence the countries must also share the same wage rates and rental rates.
4. The H-O model assumes that technology is the same between countries in order to focus on the effects of different factor endowments.
5. If production technologies differ across countries, as we assumed in the Ricardian model, then factor prices would not equalize once goods’ prices equalize.
6. As such, a better interpretation of the factor-price equalization theorem applied to real-world settings is that free trade should cause a tendency for factor prices to move together if some of the trade between countries is based on differences in factor endowments.
7. The H-O Theorem states that if the price of the capital-intensive good rises (for whatever reason), then the price of capital—the factor used intensively in that industry—will rise, while the wage rate paid to labor will fall
8. The Heckscher-Ohlin model is an economic theory that proposes that countries export what they can most efficiently and plentifully produce.
9. The model emphasizes the export of goods requiring factors of production that a country has in abundance and distribution of income is based on efficiency of production

Reason behind the Heckscher-Ohlin model is consistent with low skilled workers wanting more trade barriers

Exports from the United States are relatively more labor-intensive, and imports relatively more capital-intensive, whereas the United States was at the time seen as the most capital-abundant country.

Therefore if we considered this HO Model it give more emphasis on utilizing the comparative advantages of country for Example, China should produce all products where there is more labor are required to reduce the cost of production,

If we see not all workers are the same. and U.S. exports are more intensive in skilled workers and U.S. imports are more intensive in unskilled workers.

Not all unskilled workers are the same. US workers are more efficient than workers from the South. They have higher productivity. So finally the United States has an effective hourly labour input that is not so small. Adding differences in productivity (Ricardo) to an HO model explains a large part of world trade.

The predictions work better for North-South trade exploiting differences than for North-North trade based on exploiting similarities and economies of scale)

For example, China clearly exports low-skilled labour-intensive goods i.e.clothing to the North and imports mainly machinery and chemicals from USA.

Preferences in the North that are heavily biased towards the consumption of more capital-intensive goods differences in preferences as a determinant of trade.

However higher-skilled workers wants less trade barrier so that they can use the talent and technology transfer strategies to developing countries and earn more profits.