Capital Utilization in the Heckscher-Ohlin Model

Roger R. Betancourt, Christopher Clague, and Arvind Panagariya, International Trade Journal 2(1), 1-22, September .


International variations in capital utilization as a result of operations are a significant but neglected characteristic of the world economy. In this paper we introduce endogenous capital utilization into the Heckscher-Ohlin model and we show that: if workers differ internationally in their willingness to work the abnormal hours associated with higher levels of capital utilization, the factor-price equalization theorem will no longer be valid, nor will technology and endowments be the sole determinants of comparative advantage. An interesting feature of this result is that workers’ willingness to engage in shift-work, for example, affects, through firms’ decisions, the availability of capital services, and thus the production possibility set of the economy. Moreover, this same phenomenon also creates a situation in which capital mobility is likely to enhance rather than substitute for trade. A brief comparison with alternative approaches to the introduction of capital utilization in trade models is also provided in the paper.

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