ABSTRACT
The previous chapters assume that goods are internationally mobile (i.e. that merchandise trade occurs) but that factors of production are not mobile. The basis of Heckscher-Ohlin trade is precisely that large differences in relative factor endowments produce parallel differences in factor prices; these in turn lead to differences in relative goods prices, which makes trade based on comparative advantage possible. A country with a relative abundance of labor, for example, will have low wages, which will give it a comparative advantage in labor-intensive goods such as apparel and shoes. The fact that differences in factor prices exist prior to trade implies that labor and capital are internationally immobile; otherwise the abundant factor in each country simply moves elsewhere to earn higher returns. Labor will migrate to capital-abundant countries, and capital will move in the opposite direction, roughly equalizing relative factor endowments and prices, thus eliminating the basis for Heckscher-Ohlin trade.
