2 management - School of International Business and ...

Günter S. Heiduk
If the differences in the relative goods prices are caused by differences in the relative productivities
between two countries - but the factor endowments and the consumer preferences are identical - then
trade is determined according to Ricardo’s findings: Free trade leads to an increased availability of
goods in both countries if each country specializes in the goods production with relative high labour
productivity and exports this good, whereas each country imports the good with relative low labour
productivity. This result holds even if a country is absolutely inferior in terms of labour productivity, but
offers a relative technological advantage in the production of one good. Despite the equalization of
the relative prices on the goods markets, the relative wages disperse. Trade does not lead to factor
price equalization (Annex, figure 2). Therefore, the final situation is not Pareto-optimal. This model
ends leaving incentives for further cross-border transactions (migration and/or capital flows) open.
The Heckscher-Ohlin model is focusing on differences in the relative factor endowment between
the countries. Productivity and consumer preferences are identical. If in the free trade situation
each country specializes in the good that is produced with relative high input intensity of the
relative abundant production factor, trade enables the expansion of the bundle of goods that are
available for the consumers in each country. Again, equalization of the goods prices is the result
of trade. Furthermore, there is a tendency toward convergence of the factor prices (Annex, figure
3 a, b). The equalization of factor prices requires two additional assumptions:
– Incomplete specialization results most probably when the differences in the relative factor
endowments are low and the differences in the factor intensities are high.
– Production function that is not reversible regarding the factor intensity.
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