Better-behaved Heckscher-Ohlin models through more consistent treatment of trade costs

Date: Jan, 2011
ODID Working Paper No. 185
Author(s): Adrian Wood (ODID)

Heckscher-Ohlin logic implies that the relative costs of trading different goods are largely independent of the relative costs of producing them.  By attenuating the effects of variation in comparative advantage, the independence of trade costs helps to explain why in reality countries are less specialised, and trade less, than is predicted by the standard Heckscher-Ohlin-Samuelson (HOS) model with iceberg trade costs.  This independence similarly helps to explain why the factor prices of countries are more sensitive to their endowments than in HOS, though it also tends to increase the effects of foreign prices on factor prices.

ODID Author(s)