On the Dynamics of the Hecksher-Ohlin Theory

49 Pages Posted: 21 Nov 2010

See all articles by Lorenzo Caliendo

Lorenzo Caliendo

Yale University - School of Management

Date Written: November 1, 2010

Abstract

Over the last decades, large labor intensive countries, like China, have played a growing role in world trade. Using the factor proportions theory, this paper investigates the dynamic effects of economic growth consequent to international trade between countries with different factor proportions. I present a complete characterization of the equilibrium dynamics with initial factor endowments outside the cone of diversification where factor prices are not equalized and either one or both of the countries specialize. I …find that while a small country can grow without the retarding force of a terms-of-trade deterioration, a large, capital-intensive country can experience terms-of-trade deteriorations, as a consequence of trading with a large, labor-intensive partner. These terms-of-trade effects have consequences over growth and the pattern of specialization in production. For instance, the capital stock of the poor country can overshoot its long-run steady state. However, at the steady state, the labor intensive country will always remain poorer compared to the capital intensive country. The model can also help to explain why countries experience non-monotonic changes in their pattern of specialization as they grow, why countries do not converge to the same steady state level of income, and why non-factor price equalizations might be the most likely outcome after all.

Keywords: Factor Proportions, Terms of Trade, Growth

JEL Classification: F11, F43, O41

Suggested Citation

Caliendo, Lorenzo, On the Dynamics of the Hecksher-Ohlin Theory (November 1, 2010). MFI Working Paper No. 2010-011, Available at SSRN: https://ssrn.com/abstract=1712074 or http://dx.doi.org/10.2139/ssrn.1712074

Lorenzo Caliendo (Contact Author)

Yale University - School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://faculty.som.yale.edu/lorenzocaliendo

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