proposed by British economist David Ricardo
This model shows that comparative advantage is influenced by
the interaction between nations’ resources (the relative abundance of factors of production).
the tech-nology of production (which influences the relative intensity with which different factors of production are used in the production of different goods)
Model of a Two-Factor Economy
Prices and Production
QC = QC (KC, LC)
QF = QF (KF, LF)
QC and QF are the output levels
KC and LC are the amounts of capital and labor
KF and LF are the amounts of capital and labor
aKC = capital used to produce one yard of cloth
aLC = labor used to produce one yard of cloth
aKF = capital used to produce one calorie of food
aLF = labor used to produce one calorie of food
Choosing the Mix of Inputs
Factor Prices and Goods Prices
The importance of a particular factor’s price to the cost of producing a good
depends, however, on how much of that factor the good’s production involves.
Resources and Output
Generally, an economy will tend to be relatively effective at producing goods that are intensive in the factors with which the
country is relatively well endowed.
Effects of International Trade
between Two-Factor Economies
Home has a higher ratio of labor to capital than Foreign does.
Relative Prices and the Pattern of Trade
Hecksher-Ohlin Theorem: The country that is abundant in a factor exports the good
whose production is intensive in that factor.
Trade and the Distribution of Income
The general conclusion
Owners of a country’s abundant factors gain from trade, but owners of a country’s scarce factors lose.
Skill-Biased Technological Change and Income Inequality
Factor-Price Equalization
Empirical Evidence on the Heckscher-Ohlin Model
Trade in Goods as a Substitute for Trade in Factors:
Factor Content of Trade
The Case of the Missing Trade
A Better Empirical Fit for the Factor Content of Trade
Patterns of Exports between Developed and Developing Countries
Implications of the Tests