Endogenous Trade in the Factor Proportions Model: The Heckscher-Ohlin-Marshall Model

Abstract:     
The neoclassical trade model is characterized by production frontiers, utility maximization, and offer curves in general functional form with general expenditure and revenue functions. The factor proportions Heckscher-Ohlin trade model is based on the comparative static analysis of production with a foundation of cost minimization and production functions but does not include utility maximization. The present paper develops a "Heckscher-Ohlin-Marshall" trade model, introducing utility maximization and balanced trade in the comparative static factor proportions model. Properties follow the underlying production structure but ambiguity arises in the local effect of changing prices on exports. Inelastic or "backward bending" offer curves are in fact part of the neoclassical trade model and the present results embody the Metzler (1949) paradox that a tariff could lower the tariff inclusive relative price of imports. The present paper analyzes the slope of offer curves in terms of the level of trade, marginal utilities, factor intensity, and factor substitution. Further, the model can be extended to include many factors and products and can be simulated.

Number of Pages in PDF File: 11

Keywords: offer curves, factor proportions, Metzler effect

JEL Classification: F1, F11

working papers series