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RESULTS OF PRODUCT-PRICE STUDIES: How Slowly Does the Heckscher-Ohlin Clock Tick?

Posted by Connie R. Aponte on July 2, 2014 in RESULTS OF PRODUCT-PRICE STUDIES |

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The Heckscher-Ohlin (HO) framework of the SS theorem assumes that within a country each factor of production can move costlessly from one industry to another. In this sense, HO theory is a long-run theory: it focuses on how the economy operates once factors have had sufficient time to locate in whatever industries they choose. In contrast, the Ricardo-Viner (RV) framework assumes that within a country some factors cannot move across industries–perhaps because these factors incur prohibitively high moving costs. In this sense, RV theory is a short-run theory: it focuses on how the economy operates when some factors cannot relocate from their current industry.

When a shock hits the economy (e.g., a change in international product prices), most trade economists presume that RV theory describes how the economy reacts in the short run while HO theory describes how the economy reacts in the long run. It is well known that the reactions usually look very different depending on the time horizon. For example, after a price rise in some industry a country’s relatively scarce factor can enjoy short-run wage increases when employed that industry–but in the long run these increases completely reverse and the factor suffers wage declines.

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