Page 58 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes and imports cloth equal to the size EC. Country B exports DB amount of cloth and imports CD
amount of steel. The capital surplus country, therefore, is exporting capital intensive good and it is
importing labour-intensive good.
Similarly, the labour surplus country is exporting labour-intensive good and it is importing capital-
intensive good.
In this case, therefore, the Heckscher-Ohlin prediction would be valid. We emphasize that it is
important that consumption should take place to the right of where the production is taking place in
country A, and to the left of where the production is taking place in country B. Only then the two
countries will specialize in the production as well as export of the commodities which involve intensive
use of their respectively abundant factors of production. It is by no means necessary that the taste
pattern in the two countries must be identical. In Figure 4.9, we have made that assumption in drawing
a common indifference curve IC both for country A and country B, but it is not necessary. One can
feel free to assume that taste patterns in the two countries are different, if that sounds more realistic.
For instance, in Figure 4.9, we have also drawn IC and IC which represent different demand (or
A
B
utility) patterns in country A and country B. This would only mean that country A is consuming at
point R while it produces at point A, and that country B is producing at point B and consuming at
point T. Nevertheless, country A exports steel (equal to AH amount) and imports cloth (equal to HR
amount); and country B exports FB amount of cloth and imports TF amount of steel. Therefore, as
long as the consumption points lie to the right of where production is taking place in country A and
to the left of where the production is taking place in country B, the Heckscher-Ohlin prediction
concerning production specialization as well as commodity composition of exports and imports by
countries would perfectly hold good.
If, on the other hand, the demand patterns are so unidentical that the indifference curve of country A
is tangent at point A (not drawn in Figure 4.9) and the indifference curve of country B is tangent at
point B (also not drawn in Figure 4.9), then it would mean that country A and B choose to consume
where they produce. There will then be no trade, but a situation of autarky. In such an event, the
Heckscher-Ohlin prediction will still be valid but only insofar as it related to production specialization
but not structure of trade. There will, in fact, be no trade to speak of.
Now, let us take the other case, i.e. when the consumption and production are biased in the same
direction. This case is illustrated in Figure 4.10.
Figure 4.10 reproduces the same information as in Figure 4.9, except that in Figure 4.10, the demand
in country A is biased toward the capital-intensive good and that in country B the demand is biased
toward the labour-intensive good. Therefore, as a result, country A produces at point A, specializing
in the production of steel. It consumes at point D, given the utility pattern represented by indifference
curve IC . This means that country A exports EA amount of cloth and imports ED amount of steel.
A
Therefore, country A which is a capital surplus country, is exporting labour-intensive good (cloth)
and importing capital-intensive good (steel). This is in direct conflict with the Heckscher-Ohlin
prediction concerning the commodity structure of trade.

P D
IC A
A
Steel E

B

G
F
IC B
Cloth P
Figure 4.10 : Consumption and production biases in the same direction.

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