ECON6023 · International Trade
The Heckscher-Ohlin Model (Long Run)
Week 5 introduces the long-run two-factor model built on factor abundance and factor intensity, and its four theorems — Heckscher-Ohlin, Stolper-Samuelson, Rybczynski and factor-price insensitivity. Distinguishing these clean long-run results from the short-run specific-factors results is a common exam trap, and in-class Quiz 1 falls in this week.
What this chapter covers
- 01Assumptions: two factors (labour, capital) both mobile long run; factor intensity; factor abundance; identical technology and homothetic tastes
- 02Factor intensity (L_s/K_s > L_c/K_c) and factor abundance (L*/K* > L/K) defined at a common wage-rental ratio
- 03Heckscher-Ohlin theorem: a country exports the good using its abundant factor intensively
- 04Stolper-Samuelson theorem: a rise in a good's relative price raises the real return of its intensive factor, lowers the other's
- 05Rybczynski theorem: at fixed prices, more of a factor raises the output of the industry using it intensively, lowers the other
- 06Factor-price insensitivity: endowment changes are absorbed by the output mix with factor prices unchanged (inside the cone)
- 07Mechanism: goods prices → relative factor demand W/R → factor intensities → real factor prices
- 08Empirics: the Leontief paradox and its resolutions (effective factor endowments, skilled vs unskilled labour)
Applying the four HO theorems: trade pattern and Stolper-Samuelson
- +1Trade pattern (Heckscher-Ohlin theorem). Home is labour-abundant and apparel uses labour intensively, so Home exports apparel and imports machinery — a country exports the good that uses its abundant factor intensively.
- +1Real factor prices (Stolper-Samuelson theorem). Opening to trade raises the relative price of apparel at Home (the good it now exports). Because apparel is labour-intensive, the real wage rises and the real rental on capital falls — the abundant factor gains, the scarce factor loses.
- +1Magnification. For the rise in the apparel price, ΔR/R < 0 < ΔP_apparel/P_apparel < ΔW/W: the real wage rises by more (in percentage terms) than the goods price, and the real rental falls outright.
- +1Contrast with specific factors. In the short-run specific-factors model the effect on labour (the mobile factor) is ambiguous — real wage up in one good, down in the other. In the long-run Heckscher-Ohlin model labour is mobile across both sectors, so the result is clean: labour, the abundant factor, unambiguously gains in real terms.
Key terms
- Factor abundance
- A country is labour-abundant if L/K exceeds the other country's, i.e. it has relatively more of that factor. Abundance (a relative endowment idea) drives the Heckscher-Ohlin trade pattern.
- Factor intensity
- A good is labour-intensive if it uses a higher labour-capital ratio than the other good at any common wage-rental ratio. Intensity is a property of the good's technology, not of a country.
- Heckscher-Ohlin theorem
- A country exports the good that uses its abundant factor intensively and imports the other. The core prediction of the long-run factor-proportions model.
- Rybczynski theorem
- At constant goods prices, an increase in one factor's endowment raises the output of the industry using it intensively and lowers the output of the other industry — the engine behind long-run migration and FDI results.
- Factor-price insensitivity
- Within the diversification cone and at fixed goods prices, a change in factor endowments is absorbed by changing the output mix, leaving wage and rental unchanged. Explains why long-run immigration need not move wages.
- Leontief paradox
- The 1947 finding that the capital-abundant US exported labour-intensive and imported capital-intensive goods — the opposite of Heckscher-Ohlin. Resolved by effective (productivity-adjusted) factor endowments and distinguishing skilled from unskilled labour.
The Heckscher-Ohlin Model (Long Run) FAQ
What is the difference between factor abundance and factor intensity?
Abundance describes a country: it is labour-abundant if it has a relatively high labour-capital endowment ratio. Intensity describes a good: apparel is labour-intensive if it uses a relatively high labour-capital ratio in production. The Heckscher-Ohlin theorem pairs them — the labour-abundant country exports the labour-intensive good. Confusing the two reverses the predicted trade pattern.
How do I keep the four theorems straight?
Tie each to what it holds fixed. Heckscher-Ohlin: the pattern of trade from endowments. Stolper-Samuelson: goods prices change → real factor prices change (abundant factor gains). Rybczynski: goods prices fixed, endowment changes → outputs change. Factor-price insensitivity: endowment changes are absorbed by outputs with factor prices unchanged. Two are about prices, two are about quantities.
Can AI help me with Heckscher-Ohlin and its theorems?
Yes. Sia can quiz you on which theorem applies, draw the relative factor demand/supply and PPF-with-trade-triangle diagrams, and sign the real-factor-price changes step by step — including the trap of mixing long-run HO with short-run specific factors. It explains and checks your reasoning; it does not do graded work, and USyd academic-integrity rules apply. Confirm Quiz 1 timing on Canvas.
Why is the Leontief paradox important for the exam?
Because it tests whether you understand the model's assumptions. The paradox (capital-abundant US exporting labour-intensive goods) breaks the raw theorem, and the resolutions — measuring effective, productivity-adjusted endowments and separating skilled from unskilled labour — show the theorem survives once abundance is measured correctly. Examiners like it as a link between the theory and the data.
Exam move
Build a one-line card for each of the four theorems stating exactly what it holds fixed and what moves, then drill applying the right one to a prompt — this is where the marks are won or lost, with in-class Quiz 1 falling in the same Week-5 window (check your Canvas outline for exactly what it covers). Practise the PPF-with-trade-triangle and the relative factor demand/supply diagrams, signing real wage and rental for a price change (Stolper-Samuelson with magnification). Always check whether the question is long run (HO) or short run (specific factors) before signing labour's return. Learn the Leontief paradox and its effective-endowment resolution as a short-answer set piece. Confirm exam and quiz timing on Canvas.
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