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By Robert C. Feenstra

Brand new and extremely transparent presentation of the mainstream thought of overseas alternate.

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2-2 Feenstra, Advanced International Trade Heckscher-Ohlin-Samuelson (HOS) model The basic assumptions of the HOS model were already introduced in the previous chapter: identical technologies across countries; identical and homothetic tastes across countries; differing factor endowments; and free trade in goods (but not factors). For the most part, we will also assume away the possibility of factor-intensity reversals. Provided that all countries have their endowments within their “cone of diversification,” this means that factor prices are equalized across countries We begin by supposing that there are just two countries, two sectors and two factors, exactly like the two-by-two model we introduced in chapter 1.

This excess demand will bid up the relative price of good 1, so that the foreign autarky price must be higher than at home, p a∗ > p . a To establish the free trade equilibrium price, let z(p) denote the excess demand for good 1 at any prevailing price p at home, while z*(p*) denotes the excess demand for good 1 abroad. World excess demand at a common price is therefore z(p) + z*(p*), and a free trade equilibrium occurs when world excess demand is equal to zero. The home autarky equilibrium satisfies a a a a z(p ) = 0, and we have shown above that z*(p ) > 0.

A If p is also the autarky price in the foreign country, then production must occur at the a tangency between the price line with slope p and the foreign PPF, or at point B’. Notice that from the Rybcynzski Theorem, point B’ must lie above and to the left of point A: the higher capital endowment abroad leads to more of good 2 and less of good 1. The price line through point B’ acts like a budget constraint for the representative consumer in the foreign country, so that the consumer chooses the highest indifference curve on this price line.

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