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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.

Suggested Citation

  • Lorenzo Caliendo, 2010. "On the Dynamics of the Hecksher-Ohlin Theory," Working Papers 2010-011, Becker Friedman Institute for Research In Economics.
  • Handle: RePEc:bfi:wpaper:2010-011
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Taketo Kawagishi & Kazuo Mino, 2016. "Time Preference and Income Convergence in a Dynamic Heckscher–Ohlin Model," Review of International Economics, Wiley Blackwell, vol. 24(3), pages 592-603, August.
    3. Hu, Yunfang & Mino, Kazuo, 2013. "Trade structure and belief-driven fluctuations in a global economy," Journal of International Economics, Elsevier, vol. 90(2), pages 414-424.
    4. Lechthaler, Wolfgang & Mileva, Mariya, 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 (IfW).
    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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