A dynamic two country Heckscher-Ohlin model with non-homothetic preferences (Q639896): Difference between revisions

A generalization of the Heckscher-Ohlin (H-O) model is considered, eliminating the assumption that countries have identical and homothetical preferences with constant intertemporal elasticity of substitution. The authors focus on three results of the benchmark model regarding comparative advantages and the patterns of trade, and study whether they continue to hold in the proposed generalization. (i) The benchmark model exhibits a continuum of steady states capital stocks consistent with a free trade equilibrium for the world economy. This feature is maintained in the generalized model with a difference: the world capital stock varies across steady states because the steady state income distribution affect world demands. (ii) In the benchmark model, the country that is capital abundant in the steady state will export the capital intensive good, i.e., a steady state H-O theorem holds. This result is only valid in the new model if the countries have a common discount factor, no labor productivity differences and goods are normal in consumption. (iii) A dynamic version of the H-O theorem holds for the classical model, in the sense that the country that is capital abundant at the initial position will continue to be capital abundant at the steady state and will export the capital-intensive good on the path to the steady state. This result continues to hold for the model considered in this paper under the assumptions of (ii). The authors also provide an example to show the differences between the two models. Considering a specific function form of the utility function that allows for satiation and inferiority in consumption, the authors show that the modified model may present multiple steady state equilibria, that the static H-O theorem may be violated in the steady state and that some of the steady state equilibria may be Pareto dominated. Furthermore, the possibility of dynamic indeterminacy arises if discount factors differ across countries.