Factor Endowments: Commodity and Factor Prices
In Chapter 3 we set out briefly the central arguments of the primary theory of international trade. The supply of goods in trade was based on comparative costs. The classical economists in the Ricardian tradition measured these costs in labour units following the labour theory of value. Later Haberler dispensed with this simplication, measuring cost not in input units but in opportunity cost terms. However measured, the supply side of the model remained based upon comparative costs. This has so far been accepted, but it is now necessary to inquire what may be the determinants of comparative costs themselves and further, what effect does trade have upon the cost differences which create it? This chapter is, therefore, an elaboration of the theory of supply in international trade. It starts by examining a phrase which has already crept into the discussion — the phrase ‘factor endowments’. It is here that we may amplify the theory of comparative costs into a theory of relative prices. It ends by demonstrating that, under the assumptions of the trade model, trade causes cost differences themselves to disappear. The first part is concerned with the Heckscher-Ohlin theorem, the second with the factor—price equalisation theorem.
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- 2.Bertil Ohlin, Interregional and International Trade, rev. ed. (Cambridge, Mass.: Harvard University Press, 1967 ).Google Scholar
- 3.P. T. Ellsworth, The International Economy, 4th ed. ( Toronto: Collier-Macmillan of Canada, 1969 ), p. 80.Google Scholar
- 6.A. P. Lerner, ‘Factor Prices and International Trade’, Eca (February 1952); also P. T. Ellsworth, International Economy p. 91.Google Scholar
- 8.For example R. H. Leftwich, The Price System and Resource Allocation 3rd ed. (New York: Holt, Rinehart & Winston, 1966), especially Chapter 7.Google Scholar
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- 10.These two basic propositions are highlighted by H. G. Johnson in his article ‘Factor Endowments, International Trade, and Factor Prices’, MS (September 1957), pp. 270–83, reprinted in Caves and Johnson, International Economics Chapter 5.Google Scholar
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