On an additional condition for factor-price equalization in intertemporal Heckscher-Ohlin models

Abstract

The pure theory of international trade based on two homogenous goods, two factors, two countries Heckscher-Ohlin models distinguishes between two possible outcomes of international trade: Either factor prices are equalized and both countries are incompletely specialized or at least one country is completely specialized and no factor-price equalization obtains. The assumptions necessary for factor-price equalization (FPE) are free trade, absence of trade impediments including transportation costs, that both countries produce with the same technology and the absence of factor-intensity reversal. Taking into consideration models combining the Heckscher-Ohlin approach with endogenous growth (see, e.g. Grossman and Helpman, 1991a, ch.7, Dinopoulos et.al., 1993) one becomes aware of the fact that in an intertemporal context, another condition adds to the one mentioned above: Individual discount rates must not differ between countries. In the following, this effect is demonstrated in, what we believe, the simplest possible way by using a slightly modified version of the Grossman and Helpman (1989) model. The modification consists of fixing the numbers of factors to two and in assuming fixed R&D costs (see e.g. Barro and Sala-i-Martin, 1992). Please note that the effect presented does not depend on these simplifications but arises in models with positive long-run growth rates and more sophisticated R&D specifications, too (cf. Chapter 3).

Slightly modified version of Wälde (1994a).