Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

∂

∂

∂

∂

α

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

Cite as: Pol Antras, course materials for 14.581 International Economics I, Spring 2007. MIT OpenCourseWare(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

The Small Open Economy Case

Consider �rst the case of a small open economy that faces exogenously givengoods prices pA and pB . In this case we can forget about condition (4). Letus drop country superscripts.

De�nitionAn equilibrium of a small open economy is a production vector X = (XA ,XB ) anda factor-price vector ω = (w , r) such that (1), (2) and (3) are satis�ed.

Why don�t we worry about balanced trade? Walras�Law

De�nitionTechnologies do not feature factor intensity reversals whenever the technology

matrix A =�aLA (ω) aLB (ω)aKA (ω) aKB (ω)

�is non-singular, that is whenever

aLA (ω) aKB (ω) 6= aLB (ω) aKA (ω) for any ω.

Pol Antràs (Harvard & MIT) Lecture 4: The 2x2x2 Heckscher-Ohlin Model: Part I Spring 2007 6 / 12

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ω ω ω ω ω

ωω

ωω

ωωω

ωω

ω

ω ωω

ω ω ω

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ˆˆ

θ θθ θ

ˆˆ

θ θ /

ˆˆ

θ θ ˆ θ ˆ ˆθ θ

θ θ ˆ θ ˆ ˆθ θ

ˆ ˆ ˆ ˆ ˆ ˆ θ θˆ ˆ ˆ ˆ θ θ

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w

r

pA=cA(w,r)

p'A=cA(w,r)

pB=cB(w,r)

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λ ˆ λ ˆ ˆ

λ ˆ λ ˆ ˆ

λλ λ

ˆ ˆ λ λ ˆˆ ˆ λ λ ˆ ˆ ˆ

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L'

KXB

X'A

L

XA

X'B

aKB/aLB

aKA/aLA

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