Heckscher-Ohlin Theory -- Supplementary Graph

This graph corresponds to the comment sheet from Dr. Edwards on Heckcher-Ohlin.

The interpretation is as follows:
Initially the US is producing both items for itself (point A), ditto for Mexico (point X).  Cars are relatively
cheap in the US, agricultural products are relatively cheap in Mexico.  Opportunities for profit exist
for US entrepreneurs in exporting cars to Mexico; Mexican entrepreneurs will profitably export ag. to
the US. The US increases production of autos for trade to Mexico, Mexico increases ag production for
trade to US. Eventually, the US moves to point B, and Mexico moves to point Y.

Additional information: the points B and Y represent an equilibrium for each country because the price
ratios for the two products are the same in each country.  That is, a "world price" of autos and of
agricultural products has been established. The price ratios are revealed by the slope of the production
possibilities curve at a given point.  The slopes of the curves at B and Y are taken to be the same
(slight construction inaccuracy).
 


 
 
 
 

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