Sunday, March 29, 2009

Commodity Factor Intensity and Heckscher-Ohlin

A commodity is said to be factor-x-intensive whenever the ratio of factor x to a second factory is larger when compared with a similar ratio of factor usage of a second commodity.For example ,steel is said to be capital intensive Compared with cloth if the K/L ratio in steel production is larger than the K/L ratio in cloth production .H-o assumes not only that the difference holds for all possible factor price ratios in both countries .This means that at all possible factor prices,the isoquants reflecting the technology used in stell production are more oriented toward the capital axis ,compared with the isoquants reflecting cloth production,so that the capital/labor ratio for steel will always be larger than that for cloth .it is important to note that this assumption does not preclude substituting labor for capital if capital becomes relatively more expensive ,or substituting capital for labor if the relative price of labor rises .while such price changes would indeed change the capital/labor ratios in both commodities,they would never cause cloth to use more capital relative to labor compared with steel.This is a strong assumption and it is critical to the H-O analysis .we will later examine some possible conditions when it would not hold and the resulting implications for international trade.

No comments: