Extended Heckscher-Ohlin Model with Transaction Costs and Technological Comparative Advantage

Extended Heckscher-Ohlin Model with Transaction Costs and Technological Comparative Advantage

  • Submitted By: Briggie
  • Date Submitted: 10/26/2009 5:19 PM
  • Category: Miscellaneous
  • Words: 5009
  • Page: 21
  • Views: 1031

1.0 Introduction

The title of this paper is “The extended Heckscher-Ohlin model with transaction costs and technological comparative advantage”. In this paper, the authors have made few modifications to the Heckscher-Ohlin (HO) model, and they named it as the extended HO model.

In the traditional HO model, it is assumed to have no transaction costs and identical technology across nations. The authors have made few modifications on the HO model, and they named their model as the extended HO model. By allowing transaction cost and technological differences in the HO model, the authors examine the four core theorem in the HO model, Heckscher (HO) theorem, factor price equalization theorem, Stolper-Samuelson Theorem and Rybczynski Theorem.

According to Trefler (Cheng, Sachs, Yang, 1999), the HO model is found to only half of the time consistent with empirical findings. Tombazos, Yang, and Zhang, (2003) point out the usual suspect to failed the HO model, such as identical production technology between nations, factors of production are not traded internationally, transaction cost and similar preferences. Efforts to rejuvenate the HO model are focus on the released of some of the assumptions.

Besides introducing transaction costs and technological differences in to the original HO model, the authors have some amendments. Both marginal and inframarginal comparative static analyses are used to observe the co-movement of factor and good prices. Firstly, in the extended HO model, equilibrium good and factor prices are endogenized. This is the opposite side of the traditional HO model where the prices are exogenized. As explained by the authors, treating prices as exogenous in the HO model is unjustified. The interaction among prices and other factors are ignored, when the prices are treated exogenously.

Secondly, the extended HO model takes into account of all trade structures including the autarky state. Conversely, the traditional HO model only...

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