International Trade - Theory and Policy, 2010a

tariffs or other government regulations are imposed within the context of a Heckscher-Ohlin (H-O)
model.
Due to the assumption of perfect competition in all markets, if production occurs in an industry, then
economic profit is driven to zero. The zero-profit conditions in each industry imply
PS = aLS w + aKS r
and
PC = aLC w + aKC r,
where PS and PC are the prices of steel and clothing, respectively; w is the wage paid to labor, and r is the
rental rate on capital. Note that aLSw[labor−hrston$labor−hr=$ton] is the dollar payment to workers per ton
of steel produced, while aKSr[capital−hrston$capital−hr=$ton] is the dollar payment to capital owners per ton
of steel produced. The right-hand-side sum then is the dollars paid to all factors per ton of steel produced.
If the payments to factors for each ton produced equal the price per ton, then profit must be zero in the
industry. The same logic is used to justify the zero-profit condition in the clothing industry.
We imagine that firms treat prices exogenously since any one firm is too small to affect the price in its
market. Because the factor output ratios are also fixed, wages and rentals remain as the two unknowns.
In Figure 5.4 "Zero Profit Lines in Clothing and Steel", we plot the two zero-profit conditions in wage-rental
space.
Figure 5.4 Zero Profit Lines in Clothing and Steel
The set of all wage and rental rates that will generate zero profit in the steel industry at the price PS is
given by the flatter blue line. At wage and rental combinations above the line, as at points A and D, the
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