Factor Proportion, Inter-Sectoral Trade, and Product Life Cycle

Abstract

This chapter is devoted to work out main propositions of neoclassical trade theory in a temporary equilibrium of the two-country OLG model of the previous chapter. Mathematically spoken, the neoclassical trade theory consists of three lemmas and one proposition: the Stolper-Samuelson Theorem, the Rybczynski Theorem, the Heckscher-Ohlin-Samuelson Theorem and the Heckscher-Ohlin Theorem. We prove all these theorems by using the log-linear utility functions and the Cobb-Douglas production functions of our basic two-country OLG model without money and government bonds. We illustrate the main claims graphically and provide intuitive explanations for them. We also point out empirical limitations of the factor proportion theory (Leontief paradox) and present theoretical advancements like the neo-factor-proportion theory and the product-cycle hypothesis to cope with the restrictions of the basic theory.