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On the Dynamics of the Hecksher-Ohlin Theory

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  • Lorenzo Caliendo

    (Yale School of Management)

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 Â…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.

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Paper provided by Becker Friedman Institute for Research In Economics in its series Working Papers with number 2010-011.

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Date of creation: 2010
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Handle: RePEc:bfi:wpaper:2010-011

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  1. Donald R. Davis & David E. Weinstein, 1998. "An Account of Global Factor Trade," NBER Working Papers 6785, National Bureau of Economic Research, Inc.
  2. Gaitan, Beatriz & Roe, Terry L., 2007. "Path Interdependence Among Early and Late Bloomers in a Dynamic Heckscher-Ohlin Model," Bulletins 7183, University of Minnesota, Economic Development Center.
  3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  4. Choi, E. Kwan & Harrigan, James, 2003. "Handbook of International Trade," Staff General Research Papers 11375, Iowa State University, Department of Economics.
  5. Zhiqi Chen, 1992. "Long-Run Equilibria in a Dynamic Heckscher-Ohlin Model," Canadian Journal of Economics, Canadian Economics Association, vol. 25(4), pages 923-43, November.
  6. Daron Acemoglu & Jaume Ventura, 2002. "The World Income Distribution," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 659-694, May.
  7. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," NBER Working Papers 8460, National Bureau of Economic Research, Inc.
  8. Marianne Baxter, 1991. "Fiscal policy, specialization, and trade in the two-sector model: the return of Ricardo?," Discussion Paper / Institute for Empirical Macroeconomics 56, Federal Reserve Bank of Minneapolis.
  9. Debaere, Peter & Demiroglu, Ufuk, 2003. "On the similarity of country endowments," Journal of International Economics, Elsevier, vol. 59(1), pages 101-136, January.
  10. Stokey, Nancy L, 1996. " Free Trade, Factor Returns, and Factor Accumulation," Journal of Economic Growth, Springer, vol. 1(4), pages 421-47, December.
  11. Claustre Bajona & Timothy Kehoe, 2010. "Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 487-513, July.
  12. Claustre Bajona & Timothy J. Kehoe, 2006. "Demographics in dynamic Heckscher-Ohlin models: overlapping generations versus infinitely lived consumers," Staff Report 377, Federal Reserve Bank of Minneapolis.
  13. Baldwin, Richard E, 1992. "Measurable Dynamic Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 162-74, February.
  14. Nishimura, Kazuo, 1985. "Competitive equilibrium cycles," Journal of Economic Theory, Elsevier, vol. 35(2), pages 284-306, August.
  15. Paul Oslington & Isaac Towers, 2010. "Trade, Migration, and Inequality in a World without Factor Price Equalization," Review of International Economics, Wiley Blackwell, vol. 18(4), pages 650-662, 09.
  16. Mountford, Andrew, 1998. "Trade, convergence and overtaking," Journal of International Economics, Elsevier, vol. 46(1), pages 167-182, October.
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Cited by:
  1. Taketo Kawagishi & Kazuo Mino, 2013. "Time Preference and Income Convergence in a Dynamic Heckscher-Ohlin Model," KIER Working Papers 880, Kyoto University, Institute of Economic Research.
  2. Wolfgang Lechthaler & Mariya Mileva, 2013. "Trade Liberalization and Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms and Comparative Advantage," Kiel Working Papers 1886, Kiel Institute for the World Economy.
  3. Yunfang Hu & Kazuo Mino, 2013. "Trade Structure and Belief-Driven Fluctuations in a Global Economy," KIER Working Papers 841, Kyoto University, Institute of Economic Research.
  4. Jiandong Ju & Kang Shi & Shang-Jin Wei, 2011. "On the Connections between Intertemporal and Intra-temporal Trades," NBER Working Papers 17549, National Bureau of Economic Research, Inc.
  5. Wolfgang Lechthaler & Mariya Mileva, 2013. "Two-Country Dynamic Model of Trade with Heterogeneous Firms and Comparative Advantage," WWWforEurope Working Papers series 12, WWWforEurope.

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