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Factor price divergence in Heckscher-Ohlin model when countries have different technologies: a simple numerical illustration

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  • Spirin, Victor

Abstract

One of the main criticisms of the modern trade theories is that they are based on the assumption of equivalent technologies in the trading countries. These theories explicitly assume that the trading partners possess identical technologies, and the difference in the amount of goods produced is solely due to the differences in factor endowments. In effect, opening to trade between two countries with different factor endowments is an optimization problem that redistributes labor and capital between the types of goods produced to maximize the world output. In this optimization problem both trade participants benefit from free trade, and it is possible to make everybody win. But if the two countries possess different technologies, the result is quite opposite. The optimization problem leads to the destruction of capital in the country with less efficient technology. While the main conclusions of the theory – the owners of export-oriented factor of production win and capital-abundant country will export capital-intensive goods and vice versa – will hold, the country with less efficient pre-trade technology will lose the technology altogether, and the total output of that country will fall as a result of free trade.

Suggested Citation

  • Spirin, Victor, 2022. "Factor price divergence in Heckscher-Ohlin model when countries have different technologies: a simple numerical illustration," MPRA Paper 115010, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115010
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    File URL: https://mpra.ub.uni-muenchen.de/115010/1/MPRA_paper_115010.pdf
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    References listed on IDEAS

    as
    1. Spirin, Victor, 2021. "Vanek-Reinert Effect as a Corollary of Ricardo’s Comparative “Advantage”: a Simple Numerical Illustration," MPRA Paper 108548, University Library of Munich, Germany.
    2. Spirin, Victor, 2021. "Ricardo Through the Looking Glass: (Mis)adventures of Comparative Advantage in Developing Economies," MPRA Paper 107780, University Library of Munich, Germany.
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    More about this item

    Keywords

    Free trade; Heckscher-Ohlin model; Vanek-Reinert effect; International economics.;
    All these keywords.

    JEL classification:

    • F6 - International Economics - - Economic Impacts of Globalization
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • F63 - International Economics - - Economic Impacts of Globalization - - - Economic Development

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