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A dynamic two country Heckscher–Ohlin model with non-homothetic preferences

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  • Eric Bond
  • Kazumichi Iwasa
  • Kazuo Nishimura

Abstract

We examine the properties of a two country dynamic Heckscher-Ohlin model that allows for preferences to be non-homothetic. We show that the model has a continuum of steady state equilibria under free trade, with the initial conditions determining which equilibrium will be attained. We establish conditions under which a static Heckscher-Ohlin theorem will hold in the steady state, and also conditions for a dynamic H-O theorem to hold. If both goods are normal, each country will have a unique autarkic steady state, and all steady state equilibria are saddle points. We also consider the case in which one good is inferior, and show that this can lead to multiple autarkic steady states, violations of the static H-O theorem in the steady state. Furthermore, there may exist steady state equilibria that Pareto dominate other steady states. These steady states will be unstable if discount factors are the same in each country, although they may exhibit dynamic indeterminacy if discount factors differ.
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  • Eric Bond & Kazumichi Iwasa & Kazuo Nishimura, 2011. "A dynamic two country Heckscher–Ohlin model with non-homothetic preferences," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(1), pages 171-204, September.
  • Handle: RePEc:spr:joecth:v:48:y:2011:i:1:p:171-204
    DOI: 10.1007/s00199-010-0572-8
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    Cited by:

    1. Armando Garcia Pires, 2012. "International trade and competitiveness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(3), pages 727-763, August.
    2. Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2012. "The dynamic Heckscher–Ohlin model: A diagrammatic analysis," International Journal of Economic Theory, The International Society for Economic Theory, vol. 8(2), pages 197-211, June.
    3. Ferreira, Pedro Cavalcanti & Trejos, Alberto, 2016. "Fracking, China and the Global Economy," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 777, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    4. Sugata Marjit & Punarjit Roychowdhury, 2015. "Inequality and Trade: A Behavioral-Economics Perspective," Discussion Papers 2015-08, University of Nottingham, GEP.
    5. Naoki Yoshihara & Soh Kaneko, 2016. "On the Existence and Characterization of Unequal Exchange in the Free Trade Equilibrium," Metroeconomica, Wiley Blackwell, vol. 67(2), pages 210-241, May.
    6. Xiaobing Xing & Jiexiang Xu, 2014. "The saving rate and the upgrade of the trade commodity structure in developing countries: A dynamic H-O model under an oligopolistic market structure," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 23(8), pages 1145-1169, December.
    7. P. M. Picard & A. Tampieri, 2021. "Vertical differentiation and trade among symmetric countries," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1319-1355, June.
    8. Kurose, Kazuhiro & Yoshihara, Naoki, 2016. "The Heckscher-Ohlin-Samuelson Model and the Cambridge Capital Controversies," UMASS Amherst Economics Working Papers 2016-05, University of Massachusetts Amherst, Department of Economics.
    9. Partha Sen, 2018. "Unilateral Policies, Competitiveness and the ‘Green Paradox’ in a Dynamic North–South Model," Arthaniti: Journal of Economic Theory and Practice, , vol. 17(2), pages 113-139, December.
    10. Kazuhiro Kurose & Naoki Yoshihara, 2018. "The Heckscher—Ohlin—Samuelson Trade Theory and the Cambridge Capital Controversies: On the Validity of Factor Price Equalisation Theorem," Working Papers SDES-2018-17, Kochi University of Technology, School of Economics and Management, revised Nov 2018.
    11. Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2011. "A Dynamic Heckscher-Ohlin Model and Inferior Goods," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 18(3), pages 217-236.
    12. Partha Sen, 2013. "Unilateral Emission Cuts And Carbon Leakages In A North-South Trade Model," Working papers 232, Centre for Development Economics, Delhi School of Economics.
    13. Kurose, Kazuhiro & Yoshihara, Naoki, 2018. "The Heckscher—Ohlin—Samuelson Trade Theory and the Cambridge Capital Controversies: On the Validity of Factor Price Equalisation Theorem," Discussion Paper Series 686, Institute of Economic Research, Hitotsubashi University.

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    More about this item

    Keywords

    Two-country model; Heckscher–Ohlin; Inferior good; Multiple equilibria; Indeterminacy; E13; E32; F11; F43;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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