Heckscher-Ohlin Trade Theory with a Continuum of Goods

Abstract

This paper studies trade theory for the case of a continuum of goods, two factors, two countries, and Cobb-Douglas demand functions. If factor endowments are similar, factor price equalization obtains and geographic patterns of production are indeterminate; nonetheless the effects of changes in factor endowments on prices and welfare in each country are well defined. Factor price equalization does not obtain if factor endowments are far apart, and the geographic pattern of specialization is then determinate. The effects of changes in endowments on the range of goods produced in each country and on prices of goods and factors are analyzed for this case, and the elasticity of substitution in production is shown to play an important role in determining comparative static outcomes.

The effects of factor and sector biased technical change revisited

“…the skill-intensive sectors) in terms of productivity convergence, which has quite different implications on the relative wage rate in the advanced economies. Zhu and Trefler (2005) study a model with a continuum of goods where two seminal contributions (Dornbusch et al, 1977(Dornbusch et al, , 1980 are merged. This model includes factor endowment differences as well as technological differences between countries.…”

theoretical investigation

“…If P has a continuum of elements (e.g. P = [0,1]), the model becomes the continuum Heckscher-Ohlin model a la Dornbusch, Fischer and Samuelson (1980). If P has a finite number 8 See, for example, Leamer (1996), Krugman (2000) and Xu (2001).…”

Can Comparative Advantage Explain the Growth of US Trade?

“…12 The system of equilibrium equations and the condition r H =P H = r F =P F can be solved 11 A large literature on cross-country comparison of TFP levels, summarized in Caselli [3], provides empirical evidence in favor of this hypothesis. 12 Note that we introduce cross-country di¤erences in TFP levels only to guarantee the existence of international trade in steady state: the actual trade ‡ows are generated by the induced di¤erences in relative factor endowments.…”

“…A sketch of the Heckscher-Ohlin model with many goods and trade costs that we use can be found in Mundell [19]; Dornbusch et al [11] provide an elegant formalization of the continuum of goods; Romalis [20] introduces trade costs into the model. There is a vast number of dynamic Heckscher-Ohlin models in the literature, starting with Stiglitz [23].…”