Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynKey TermsnLabor-intensive commodity （劳动密集型商品）nCapital-intensive commodity（资本密集型商品）nLabor-capital ratio (L/K)（劳动/资本比率）nCapital-labor ratio (K/L)（资本/劳动比率）Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynFactor abundance（要素丰裕度）nRelative factor prices（要素相对价格）nDerived-demand（引致需求）nHeckscher-Ohlin (H-O) theory（H-O理论）nHeckscher-Ohlin (H-O) theorem （H-O定理）Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynFactor-proportions or factor-endowment theory（要素禀赋理论）nFactor-price equalization (H-O-S) theorem （要素价格均等化定理）nImport substitutes（进口替代品）nLeontief paradox（里昂惕夫之谜）nHuman capital（人力资本）Chapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.1 IntroductionnFirstly, we explain the basis of comparative advantagenSecondly, we extend our trade model to analyze the effect that international trade has on the earnings of factors of production in the two trading nations. Chapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.4 Factor Endowments and the HeckscherOhlin TheorynEli Heckscher, “The Effect of Foreign Trade on the Distribution of Income,”(1919)nBertil Ohlin, “Interregional and International Trade” (1933) Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynThe H-O theory can be presented in the form of two theorems: nH-O theorem which deals with and predicts the pattern of trade.nFactor-price equalization theorem which deals with the effect of international trade on factor prices.Chapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.2 Assumptions of the theory1. There are two nations (Nation 1 and Nation 2), two commodities (X and Y), and two factors of production (Labor and Capital)2.Both nations use the same technology in production.Chapter 5 Factor Endowments and Heckscher-Ohlin Theory3. Commodity X is labor intensive, and commodity Y is capital intensive. 4. Both commodities are produced under constant returns to scale.5. There is incomplete specialization in production in both nationsChapter 5 Factor Endowments and Heckscher-Ohlin Theory6. Tastes are equal in both nations.7. There is perfect competition in both commodities and factor markets.8. there is perfect factor mobility within each nation but no international factor mobility.Chapter 5 Factor Endowments and Heckscher-Ohlin Theory9.There are no transportation costs, tariffs, or other obstructions to the free flow of international trade.10. All resources are fully employed in both nations.11.International trade between the two nations is balanced.Chapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.2B Meaning of the Assumptionsn5.3 Factor Intensity, Factor Abundance, and the shape of the Production FrontierChapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.3A Factor IntensitynWe say that commodity Y is capital intensive if the capital-labor (K/L) used in the production of Y is greater than K/L used in the production of X.nNote that it is not the absolute amount of capital and labor that is important in measuring the capital and labor intensity of the two commodities, but the amount of capital per unit of labor (i.e., K/L) Chapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.3B Factor AbundancenOne way is in terms of physical units (i.e., TK/TL)(TK/TL)2 (TK/TL)1nNote that it is not the absolute amount of labor and capital available in each nation in measuring the factor abundance of the two nations, but the ratio amount of TK to the TLChapter 5 Factor Endowments and Heckscher-Ohlin TheorynAnother way to define factor abundance is in terms of relative factor prices (i.e., PK/PL)(PK/PL)2 (PK/PL)1 or (r/w)2 (r/w)1 nNote that it is not the absolute amount of interest rate ( r ) and wage rate (w) in each nation in measuring the factor abundance of the two nations, but the ratio amount of r to the w.Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynThe definition of factor abundance in terms of physical units considers only the supply of factors.nThe definition in terms of relative factor prices consider both demand and supply.Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynWe assume that tastes, or demand preferences, are the same in both nations. and we know that the demand for a factor of production is a derived demand derived from the demand for the final commodity that requires the factor in its production.nThe two definitions of factor abundance give the same conclusion in our case.Chapter 5 Factor Endowments and Heckscher-Ohlin Theoryn5.3C Factor Abundance and the shape of the Production FrontiernSince Nation 2 is K-abundant nation and commodity Y is the K-intensive commodity, Nation 2 can produce relatively more of commodity Y than nation 1. nOn the other hand, Nation 1 can produce relatively more of commodity X than Nation 2Chapter 5 Factor Endowments and Heckscher-Ohlin TheorynThis give a PPF for Nation 1 that is relatively flatter and wider than the PPF of Nation 2.nFIGURE 5.2FIGURE 5-2 The Shape of the Production Frontiers of Nation 1 and Nation 2.Chapter 5 F