International Trade Theory and Policy
by Steven M. Suranovic

Trade 60-1B

Heckscher-Ohlin Model Assumptions - Production

The production functions below represent industry production not firm production. The industry consists of many small firms in light of the assumption of perfect competition.

Production of Clothing

US France

where

QC = quantity of clothing produced in the US measured in racks.

LC = amount of labor applied to clothing production in the US measured in labor-hours.

KC = amount of capital applied to clothing production in the US measured in capital-hours.

f( ) = the clothing production function which transforms labor and capital inputs into clothing output.

and where all starred variables are defined in the same way but refer to the production process in France.

Production of Steel

US France

where

QS = quantity of steel produced in the US measured in tons.

LS = amount of labor applied to steel production in the US measured in labor-hours.

KS = amount of capital applied to steel production in the US measured in capital-hours.

g( ) = the steel production function which transforms labor and capital inputs into steel output.

and where all starred variables are defined in the same way but refer to the production process in France.

Production functions are assumed to be identical across countries within an industry. Thus both the US and France share the same production function f(.) for clothing and g(.) for steel. This means that the countries share the same technologies. Neither country has a technological advantage over the other. This is different from the Ricardian model which assumed that technologies were different across countries.

A simple formulation of the production process is possible by defining the unit-factor requirements.

Let,

represent the unit-labor requirement in clothing production.

It is the number of labor-hours needed to produce a rack of clothing.

Let,

represent the unit-capital requirement in clothing production.

It is the number of capital-hours needed to produce a rack of clothing.

Similarly,

is the unit-labor requirement in steel production.

It is the number of labor-hours needed to produce a ton of steel.

And,

is the unit-capital requirement in steel production.

It is the number of capital-hours needed to produce a ton of steel.

By taking the ratios of the unit-factor requirements in each industry we can define a capital-labor (or labor-capital) ratio. These ratios, one for each industry, represent the proportions in which factors are used in the production process. They are also the basis for the model's name.

First, is the capital-labor ratio in clothing production. It is the proportion in which capital and labor are used to produce clothing.

Similarly is the capital-labor ratio in steel production. It is the proportion in which capital and labor are used to produce steel.

Definition

We say that steel production is capital-intensive relative to clothing production if:

This means steel production requires more capital per labor-hour than is required in clothing production.

Notice that if steel is capital-intensive, clothing must be labor-intensive.

Clothing production is labor-intensive relative to steel production if:

This means clothing production requires more labor per capital-hour than steel production.


REMEMBER

Factor intensity is a comparison of production processes across industries but within a country.

Factor abundancy is a comparison of endowments across countries.

International Trade Theory and Policy - Chapter 60-1B: Last Updated on 7/31/06

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