Chapter 4: The Heckscher–Ohlin Model with an Endogenous Natural Rate
INTRODUCTION In Chapter 3, we obtained the result that trade expands equilibrium employment in both countries in a two-country Ricardian world economy. In particular, despite fears that trade between developed and developing nations could lead to job loss in the former, the result applies to trade between a low-wage country (where labour productivity is low) and a highwage country (where labour productivity is high). When trade leads to complete specialisation, the pay level measured in terms of the export good is unchanged but, as the free trade relative price of the import good must be lower than the autarkic relative price when trade is based upon comparative advantage, the purchasing power of workers’ pay is increased as a result of trade. Consequently, holding a job becomes more valuable under trade with the result that equilibrium unemployment falls in both trading economies. It is sometimes felt, however, that the Heckscher–Ohlin model is the natural one to use to examine the eﬀects of the rise of the Newly Industrialising Countries’ trade on jobs and wages. In this chapter, we shall develop the Heckscher–Ohlin model with an endogenous natural rate. We will see that in this model, trade raises the real consumption wage and lowers the natural rate of the relatively labour abundant country; on the other hand, trade reduces the real consumption wage and increases the natural rate of the relatively capital abundant country regardless of the weights in the consumption basket. We will also re-examine some interesting issues...
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