Ch4-5 Summary An Introduction to International Economics, ISBN: 9781108455169 ECON0007 - The World Economy (ECON0007)
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Course
ECON0007 - The World Economy (ECON0007)
Institution
University College London (UCL)
Book
An Introduction to International Economics
This is a summary of the readings we completed for World Economy in 2020/21, which was from Reinert (2020): An Introduction to International Economics.
Reinert (2020): An Introduction to International Economics
Chapter 4: Heckscher-Ohlin Model of Comparative Advantage
Factors of Types of resources used in production processes.
Production Independent variables in the production function; firm output is the dependent variable.
FOPs: human capital (labour, value of education, training, and skills), physical capital,
natural resources.
Basic observation: countries in the world differ significantly in their endowments of
these FOPs.
Figure 4.1: Endowments of natural capital,
physical capital, and human capital by
region (%)
Factor endowments features that
characterise countries. Explanation for
comp. adv.
Factor intensities features that
characterise sectors, reflecting the
technologies associated with sectors across
all countries.
HO Model:
Patterns of comp adv are determined by the interaction of country-based factor
endowments with sector-based factor intensities.
Technologies are assumed to be identical across countries.
From Factors Assumptions:
of Production Demand (DD): rice and motorcycles are consumed in the same, fixed proportions in
to Comparative both Vietnam and Japan.
Advantage PPF: “normal” – slope is increasingly negative, indicating increasing o/c.
o Reflects the fact that the two sectors have different factor intensities they
benefit differently from additional units of the 2 factors considered.
o Focus on supply conditions: so PPF used.
O/C are fully reflected in relative prices in a system of freely operating markets, perfect
competition, and full employment of FOPs.
Example:
Vietnam: land-abundant ratio of land : physical capital is larger in V. than in Japan.
Japan: capital-abundant ratio of physical capital :land is larger in J. than in V.
Figure 4.3: The HO model of comparative advantage.
, Production: the output of one good will increase at the expense of another specialisation in
production. But it will not be complete, as in the Ricardian model.
Slope of the PPF: o/c of producing the item on the horizontal axis expressed in terms of
how many units of the item on the vertical axis must be given up.
Figure 4.5: Relative autarky prices in Vietnam and Japan
Slope of PPF where DD crosses it
= relative price of rice.
A represents the two countries
under autarky in isolation from the
rest of the world economy.
Tangency line giving relative
prices: flatter in Vietnam = o/c of
rice is lower in Vietnam than Japan
o An expression of a pattern of comparative advantage.
o The inequality involves 4 prices rather than 2 prices (as in abs. adv.)
Implication: a country can have a comp adv in a good in which it has
an abs disadvantage.
International If V. and J. abandon autarky in favour of trade, the relative world price of rice will be
Trade somewhere between the two autarky price ratios (as in the Ricardian model):
Figure 4.6: From autarky to trade between Vietnam and Japan
New production points: B
Specialisation in production:
increase in production of rice in
V. and increase in production of
motorcycles in J. autarky to
trade restructures an economy’s
production towards a good in
which the company has a
comparative advantage.
o Therefore it’s difficult to
open up the economy: resources and people need to be moved across sectors.
Figure 4.7: Trade between Vietnam and Japan.
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