We, Tombazos and Zhang, would like to dedicate this paper to our dear friend and colleague Xiaokai Yang who died in mid-2004. It is with a heavy heart that we acknowledge this contribution as one of our last co-authored papers with Xiaokai. This research has benefited considerably from discussions with Alan Deardorff, Peter Neary and Hugo Sonnenschein whom we also thank, together with Ron Jones, Murray Kemp, Ed Ray, Don Wright and an anonymous referee for very constructive suggestions on earlier drafts of this paper. We also thank the participants of the 2004 conference of the Economic Society of Australia for useful comments. Financial support from Monash University is gratefully acknowledged.
A Neo-Heckscher–Ohlin Model of Trade with Endogenous Production Patterns*
Version of Record online: 15 AUG 2005
Volume 81, Issue Supplement s1, pages S71–S81, August 2005
How to Cite
TOMBAZOS, C. G., YANG, X. and ZHANG, D. (2005), A Neo-Heckscher–Ohlin Model of Trade with Endogenous Production Patterns. Economic Record, 81: S71–S81. doi: 10.1111/j.1475-4932.2005.00251.x
- Issue online: 15 AUG 2005
- Version of Record online: 15 AUG 2005
We propose a Neo-Heckscher–Ohlin (HO) model of trade that combines comparative endowment advantage, comparative technological advantage, international capital mobility and trade costs. Using an inframarginal approach, we produce a partition of the exogenous parameter space in a host of parameter value subsets that demarcate the various equilibrium patterns of production and trade. The results are startling! They suggest that production within the diversification cone – a key assumption of the Heckscher–Ohlin theory that is required for its core propositions (such as factor price equalisation) to hold – may only prevail on the razor's edge, or under exceptional circumstances. In addition, our findings nominate a mechanism by which improvements in transaction efficiency facilitate international trade thereby stimulating cross-country division of labour. Contrary to other generalisations of the Heckscher–Ohlin (such as the various derivatives of the Kemp–Jones model of trade), our model does not assume a purely Ricardian character: comparative endowment advantage may determine the pattern of trade even in the presence of opposing technological differences, as long as total factor productivity coefficients adjusted for transaction efficiency and factor intensity do not confer unambiguous comparative (technological) advantage. Still, ‘intensity-efficiency’-adjusted comparative technological advantage supersedes factor endowments in determining the flow of trade.