The Heckscher-Ohlin (H-O) theorem states that a country that is capital abundant will export a capital intensive good and a country that is labor abundant will export a labor-intensive good. This allows for countries to export what they are good at producing and what they are relatively better at producing than other countries.
In problem set one we saw an example of this with Sweden and Norway, one being capital abundant producing automobiles and one being labor abundant and using its resources effectively producing fish. In this blog, I want to take a closer look at an example like this and demonstrate how the H-O model translates from theory to practicality.
As the H-O model assumes that both countries have the same technological production, a good time to look at this theory would be post World War Two, when world technologies were increasing allowing for more capital-output and cheaper production.
An example of a capital abundant country and therefore a country who exported capital intensive goods after World War Two would be Japan. They used the technology and capital abundance left from the World Wars to produce capital intensive good - automobiles. This is interesting as pre-WW2 Japan was a labor-intensive country.
For labor abundant countries, we started to see countries like Thailand and Vietnam producing clothing and more labor-intensive goods. This is where we see most of our clothing from still today, so Vietnam and Thailand moved towards being labor abundant and producing labor-intensive goods such as clothing.
Sam, very interesting points here. May be interesting to look into how Japanese wages and rental rates of capital were affected by this increase in capital stock after WW2. As for the labor abundant countries mentioned (Thailand and Vietnam), would they realize lower wages due to the high supply of labor in the labor market? Very interesting points. These factors may have changed trade relationships substantially following WW2.
ReplyDeleteThe H-O theorem assumes that tech is the same across countries. I would like to explore this more; that is, when you say world technologies were increasing, that would necessarily mean that all the technologies were increasing at the same rate, or that the tech would somehow be shared with other countries, thus technology wouldn't really be any reason for production and trade.
ReplyDeleteAnother point I'd like to mention is that your Japan example resembles more closely the specific factors model: saying that the country will trade based on the favorable specific factor; or even the Ricardian model, with hints of comparative advantage.
This blog is very class-related and gives the reader a better understanding of the H-O model in effect post and pre WW2. The example of Japan being a labor intensive pre-WW2 then becoming Capital-intensive after is very interesting and goes to show the technological production can change a countries production methods.
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