II. A closer look at international trade
A. Factor endowments and international trade:
1. The Heckscher-Ohlin (HO) theorem

    The Heckscher-Ohlin (HO) theorem: each country tends to export goods which make relatively intensive use of the country's relatively abundant factors.

    Logic:
    (1) Before trade: (PK/PL)us < (PK/PL)mex: capital is relatively cheap in the capital-abundant country (US), and labor is relatively cheap in the labor-abundant country (Mexico) because of factor supply conditions.
    (2) So, before trade: (PA/PB)us < (PA/PB)mex: capital-intensive goods (A) are relatively cheap in the US and labor-intensive goods (B) are relatively cheap in Mexico because of differing factor requirements. => comparative advantage in A goes to US and in B goes to Mexico
    (3) So with trade: US exports A and Mex exports B: the capital-abundant country (US) exports  capital-intensive goods (A) and the labor-abundant country (Mexico) exports labor-intensive goods (B).

    End result: Per Ohlin (1933): "Thus indirectly, factors in abundant supply are exported and factors in scarce supply are imported."

(example: Thai refinery)

    Trade gain #1: Trade promotes efficiency due to specialization based on factor endowments.

    K-abundant countries export K-intensive goods
    L-abundant countries export L-intensive goods

An empirical test of the HO theorem:

    Leontief, Wassily, "Domestic production and foreign trade: the american capital position re-examined." Proceedings of the American Philosophical Society 97 (1953), 331-349.
    Nobel prize, 1973.

    Leontief used US 1947 input-output tables to compute the K and L needed to produce a $1M bundle of of US X's and US M-substitutes (Proxy for M's)
    Innocent exercise. Just wanted to show you could make use of input-output tables.

    Measure of factor content of trade: (($K)/L)_X and (($K)/L)_M

    ? Prediction per HO? (($K)/L)_X > (($K)/L)_M
    ratio should be < 1.
    What Leontief found: the Leontief paradox wrong way trade
        exports: ($14,015 of K)/Lyear
        import substitutes: ($18,184 of K)/Lyear

    What went wrong? the calculations did not account for Kh

2. The Factor Price Equalization (FPE) theorem

    The HO model goes beyond just the direction of trade and output markets.
    Extends to gains from trade and how they are distributed.
    In S&D, gains appear to get divided between consumers and producers, but that can't be the whole story, since we are all both consumers and producers.
    HO allows us to do better.

    Example:

    Meanwhile, the opposite is happening in Mexico.

    Overall results:
    pretrade PK starts out relatively low in the US
        trade --> +PKus & -PKmex => PK converges
    pretrade PL starts our relatively high high in the US
        trade --> -PLus & +PLmex => PL converges

    The factor price equalization (FPE) theorem: Globalization tends to make factor prices converge across countries

    What we expect to find in practice: 
    Conditional convergence: Since factor prices converge with trade, overall GNPs per capita converge to the extent that factor endowments are similar.

    FPE => Globalization makes factor prices become more equal between countries.

3. The Stolper-Samuelson (SS) theorem

    Bot the FPE and SS theorems apply to how globalization affects incomes.
    The FPE theorem applies to what happens between countries with globalization
    The SS theorem applies to what happens within countries with globalization

    The SS theorem is my nominee for an economic concept that is (1) important; (2) universally accepted by international economists, and (3) widely misunderstood by almost everyone else.

    Many think the income distribution results will be industry-specific: Since the US exports A and imports B, L&K employed in A will gain and L&K in B will lose.

    ? Why is it not economically plausible that in the long run labor would earn more in export industry A than in import-competing industry B?

    In a competitive economy, long-run income gains and losses are economy-wide rather than industry-specific because of factor mobility
    In the US it is not just labor in the import-competing industry which loses with free trade. Workers who lose their jobs in basic goods industries then compete for other jobs, bidding down wages throughout the economy. So these income distributional effects get spread over the entire resource, wherever it gets employed.

    But, are workers in DCs really worse off?

    Example: 
    Before trade:
    PK in Mexico is 60% higher than in US (+60%)
    PL in Mexico is 80% lower than in US (-80%)

    Worksheet