Factor mobility and international trade

Abstract

This paper develops a two-country model of trade and factor mobility in which capital is sector-specific but internationally mobile. The model avoids the implausible predictions of specialisation in Heckscher-Ohlin models and exhibits a rich variety of responses to exogenous shocks, including transfers, capital taxes, and tariffs. The results throw light on the relationship between goods and factor trade, reconciling the conflicting views of previous writers. It is argued that the model holds out the possibility of a new paradigm in international trade theory in which international factor movements play a central rather than a peripheral role.