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Heckscher-Ohlin Theories from Factor Price Equalization to Factor Price Localization vs Empirical Observations from the Leontief Paradox to the Leontief Trade

Guo, Baoping (2015): Heckscher-Ohlin Theories from Factor Price Equalization to Factor Price Localization vs Empirical Observations from the Leontief Paradox to the Leontief Trade.

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Abstract

This paper extends the integrated world equilibrium into effective endowment analyses to obtain the price-trade equilibrium with factor price non-equalization. Trefler (1993)’s effective endowments explored an important logic that a country will export its commodity that is produced by using its effective abundant factor rather than its actual abundant factor intensively. This study shows that the logic favors both the Heckscher-Ohlin trade and the phenomena of the Leontief paradox (this study refers it to Leontief trade). When a country’s actual factor abundance is not consistent with its effective factor abundance, Leontief paradox occurs. The Leontief trade not only occurs under the presence of factor intensity reversals (FIR) but also occurs with the absence of the FIR. The localized factor prices make sure gains from trade for both countries, no matter it is the Heckscher-Ohlin trade, or it is the Leontief trades. The paper explores factor price definitions of trade patterns, which explain well the skill intensity reversals reported in empirical studies.

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