Technology Effects on Trade – Virtual Factor Advantages by Technological Differences

25 Pages Posted: 4 Jul 2015 Last revised: 19 Jul 2015

Date Written: July 2, 2015

Abstract

This paper studies a 2x2x2 Ricardo-Heckscher-Ohlin Model (briefly R-H-O model) by introducing different technologies into the Heckscher-Ohlin model. The key tool of this study is presenting a solution of common commodity prices embedded with two sets of local factor prices for each countries, which is an endogenous prices fully determined by technological coefficients and by factor endowments. A virtual R-H-O system is built by extending Fisher (2010)’s concept of the virtual factor endowments. The virtual R-H-O system is a typical H-O model mathematically, so the major H-O theorems can be generalized into the virtual R-H-O model directly without much difficulty. The Heckscher-Ohlin theorem is generalized as the virtual Heckscher-Ohlin theorem in the R-H-O model, which says that a country will export the commodity that uses its virtual abundant factor intensively. The virtual factor price equalization theorem says that the factor price of a country will be equalized with the virtual factor price of its counterpart country. This means that two local (real) factor prices are non-equalization. The Rybczynski theorem is generalized to a comprehensive trade effects on the changes of local output, commodity price, and two local factor prices. One interesting result is that both countries, participated trade with different technologies, can even export same (kind of) factor content of trade and import the same (kind of) factor content of trade. It implies that the capital-labor ratio embodied in consumptions for both countries may excesses capital-labor ratio embodied in products, for some cases. It is odd to common understanding of factor content of trade by Leamer theorem (1980). This explores a new trade function – virtual factor advantage. Trade compensates the scarce resource worldwide by virtual factor endowments. The countries can produce or consume more when they trade with virtual factor advantage. The virtual advantage is sourced from technological differences and is realized by trade. It proves a new angle to think the “missing trade” and Leontief’s paradox, since the factor contents of trade are balanced by virtual factor contents, not by real factor content of trade.

Keywords: Virtual Factor Abundant, Heckscher-Ohlin model, equilibrium Price, Factor Price non-equalization, factor content, Leamer theorem

JEL Classification: F10, F20

Suggested Citation

Guo, Baoping, Technology Effects on Trade – Virtual Factor Advantages by Technological Differences (July 2, 2015). Available at SSRN: https://ssrn.com/abstract=2626202 or http://dx.doi.org/10.2139/ssrn.2626202

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
75
Abstract Views
1,023
Rank
569,600
PlumX Metrics