II. A closer look at international trade

    A closer look at why nations trade, what they trade and what happens when they trade.
    Three broad categories of focus:
    Efficiency / Technology / Variety

A. Factor endowments and international trade:
the Heckscher-Ohlin (HO) trade model

the HO model draws on factors of production to explain international trade.
    Factors of production = the basic economic inputs used to produce outputs: labor, capital and land
    1. 2 Swedish economists first put it together (Heckscher:1919; Ohlin:1933).
    2. Perhaps the most elegant model in all of economics.
    3. It's the point of departure for all other trade explanations

    Advantages:
    1. Shows where CA can come from
    2. Shows how factor prices are affected by trade.
    Importance of this: as consumers, we are concerned with output prices AND with incomes.
    We earn income by providing resources we own to producers--labor, capital, natural resources.
    So the factor-price effects of trade influence affect the distribution of income and therefore the gains from trade.

    HO is a long-run model. It predicts what will happen after all markets have had time to adjust.
        Rules out unemployment

Basic model

--The (2x2x2) model:

    Labor: pure labor power, raw unskilled L, we all have that to offer
    Capital: includes human capital (K_H), investments in skills and training

    Preview: Trade and wages quotebook
    HO can shed light on the validity of these sorts of quotes
    Note the key departure from Ricardo here: More than one input.

    3 simplifying assumptions: Both countries have...
    (1) the same tastes
    (2) the same available technologies
    (3) perfectly competitive industries
    Note: these assumptions rule out tastes, technology, and market power in order to focus on differences in supply conditions across countries.

    2 distinctive assumptions:
    (1) relative factor endowments differ across countries:
        (K/L)us > (K/L)mex
    What we say: "The US is capital-abundant compared to Mexico" or "Mexico is labor-abundant compared to the US."
    Note: it's not total K or L that matters, but K per L.

    (2) relative factor intensities differ across products:
        (K/L)A > (K/L)B
    What we say: "A is capital-intensive compared to B" or "B is labor-intensive compared to A."
    Example: labor = 90% of the cost of gardening and 70% of the cost of garments => garments are capital-intensive compared to gardening / gardening is labor intensive relative to garments
    Note: producers of both goods want to substitute in favor of labor when PL falls and/or PK rises, but the ranking of the two goods does not change.

1. The Heckscher-Ohlin (HO) theorem
        pertains to the direction of trade

    Consider the circumstances we've just laid out:
    The US is capital-abundant compared to Mexico.
    A is capital-intensive compared to B.

How it looks:
   US, Mex PPFs

US	Mex
a = autarky; A is cheap	a = autarky; A is expensive
specialize in A until costs reach global levels; export A	specialize in B and away from A until costs reach global levels; export B

    At a, PPFus is flatter than PPFmex
    At f, PPFus has same slope as PPF mex

?If the US and Mexico trade with each other, what pattern would you expect?
    US exports A; Mexico exports B.