Abstract
In this chapter we delve deeper into Ricardian theory. Heckscher and Ohlin integrated the notion of factor abundance with the fact that different goods and services employ different levels of factor intensities. Simply stated, the Heckscher -Ohlin theorem (HOT) demonstrates that a country has a comparative advantage in the good that employs its abundant factor intensely. The Stolper-Samuelson theorem (SST) shows us how each trading country's abundant factor will benefit from trade. We see how Ricardo, HOT and SST working in tandem can increase the overall welfare of both trading partners. Finally, we see the Mundell Hypothesis in-action, where movement of products and services can take the place of the migration of workers.
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Notes
- 1.
Eli Heckscher (1879–1952) and Bertil Ohlin (1899–1979) developed this model at the Stockholm School of Economics. It was first put forth in published form in 1933.
- 2.
We use the term rents in its economic sense, meaning the returns to any productively employed capital.
- 3.
The North American Free Trade Agreement of 1994 removed most trade restrictions and tariffs among the United States, Canada, and Mexico.
- 4.
Independent presidential candidate H. Ross Perot famously evoked this image in 1992, referring to the drain of jobs from the USA to Mexico that would supposedly ensue should trade barriers between the USA and Mexico be removed. Trade protectionism was a major element of the Perot platform. Perot’s statement from the first presidential debate of 1992 is worth quoting in full as it captures many elements of anti-trade sentiment: “To those of you in the audience who are business people, pretty simple: If you're paying $12, $13, $14 an hour for factory workers and you can move your factory South of the border, pay a dollar an hour for labor, hire young – let’s assume you’ve been in business for a long time and you’ve got a mature work force – pay a dollar an hour for your labor, have no health care – that’s the most expensive single element in making a car – have no environmental controls, no pollution controls and no retirement, and you don’t care about anything but making money, there will be a giant sucking sound going south.”
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© 2014 Springer Science+Business Media New York
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Langdana, F., Murphy, P.T. (2014). Factor Intensity. In: International Trade and Global Macropolicy. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-1635-7_4
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DOI: https://doi.org/10.1007/978-1-4614-1635-7_4
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