Production Indeterminacy with Three Goods and Two Factors: A Comment on the Pattern of Trade
Abstract
James Melvin's examination of the indeterminacy in the three-good, two-factor, two-country trade model prompts him to claim in his recent article in this Review that whenever all goods are traded, that country exporting the labor intensive good will also be exporting the capital intensive good (p. 1263). Recognizing the damage this claim does to the standard Heckscher-Ohlin theorem, Melvin reformulates the theorem into a much weaker proposition. We will show that Melvin's claim does not hold in general; that it is true if, and only if, both countries have identical relative factor endowments-a definitely uninteresting case. The example from which Melvin generalizes is often a possibility when endowment ratios differ, and this possibility alone is sufficiently damaging to the HeckscherOhlin theorem to merit comment. But, as we shall see, the damage is much less than Melvin would have it.
- Sources
- openalex