CHAPTER 8: Heckscher–Ohlin and Specific-Factors Trade Models for Finite Changes: How Different Are They?

In competitive international trade theory, two of the basic models are the Specific-Factors model and the Heckscher–Ohlin model, with dimensionality 3 × 2 and 2 × 2, respectively. A surprising result in Heckscher–Ohlin is that the effect on factor prices of an infinitesimal change in a commodity price depends neither on the importance of the industry nor on the differences between sectors in the flexibility of technology. For finite price changes, this need no longer be the case, and the model form itself may change endogenously as production patterns get altered. Furthermore, the extent of the response of the wage rate to a price increase in the more labor-intensive commodity becomes less severe the greater is the discrepancy between the degree of labor-intensity difference between sectors in the Heckscher–Ohlin model but more severe in the Specific-Factors model.