Issues Emanating from the HOS Model

Abstract

The HOS model, which was explained and discussed in the previous chapter, attributes differences in autarkic commodity prices to divergencies in autarkic factor prices. Also, it was demonstrated in Chapter 4 that free international trade is beneficial to countries engaging in it since the international equalisation of commodity prices enables each country to specialise in the commodity in which it has a comparative advantage. Moreover, it was shown in Chapter 3 that any change in the combined production of the two commodities entails certain changes in factor prices, hence in factor rewards. The combination of these statements raises two interesting issues: first, given the HOS model, one needs to know what happens to factor prices as a result of the complete equalisation of international commodity prices made possible by free trade and lack of transportation costs; secondly, since the HOS model postulates that a country will export commodities which are intensive in their use of the country’s abundant factor, one needs to investigate what happens to the two factors of production in conditions of both free and restricted trade in comparison with the autarkic situation.