Page 60 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes In Figure 4.10, note the following factors.
(a) In country A, steel is labour-intensive and cloth is capital-intensive. In order to produce one unit
of either steel or cloth, country A has to use the same amount of capital but more labour for steel than
for cloth. Cloth has a higher capital labour ratio and steel has a lower capital labour ratio. Therefore,
a capital rich country like country A would specialize in the production and exports of the capital
intensive good, which is cloth. It would import steel which is a labour intensive good. (b) In country
B, cloth is a labour intensive good and steel is a capital intensive good. Because, to produce one unit
of cloth, it takes a given amount of labour and smaller amount of capital as compared to steel. Steel
takes the same amount of labour but more capital per unit of output. In country B, therefore, steel has
a higher capital labour ratio than in cloth. Naturally, country B (which is a labour surplus country)
would choose to specialize in the production and exports of the labour-intensive good, viz. cloth.
Country B, therefore, would export cloth and import steel which is capital intensive.
Cloth
Steel

P 0
P 0 A
Capital

B Steel
P 1 Cloth
P 1
Labour
Figure 4.11 : Factor intensity reversal.
In this case of factor intensity reversal, as we saw above, both the countries produce and export the
same commodity i.e. cloth. In the capital rich country, (country A) it is a capital-intensive product,
and in the labour rich country, (country B) it is a labour-intensive product. That means the same
product (viz. cloth) is capital-intensive in one country but labour-intensive in the other. The same
thing applies to steel as well. Steel is a labour intensive product in the capital rich country (country
A), and it is a capital-intensive product in the labour rich country (country B). This is a situation of
factor intensity reversal. When this takes place, both countries end up producing and exporting the
same commodities (cloth) and importing the other commodity steel). This would invalidate the
Heckscher-Ohlin prediction regarding the structure of commodity trade.
In Figure 4.11, the two isoquants cut each other more than once, suggesting factor-intensity reversal
to the left of point A and to right of point B. For factor intensities to reverse themselves, it is not,
however, necessary that the two isoquants intersect each other more than once. Even if they do not
cut each other even once, there could be reversal of factor-intensities as shown in Figure 4.12.

b a
P 0 P 0

C A
Capital P 0 P 0

Q
P 1 B
(Steel)
KL P 1 P 1 b a (Cloth)
D
O Labour P 1
Figure 4.12 : Factor intensity reversal—another case.

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