Factor market distortions,factor intensities and economic welfare: Theory and computation

This paper shows that (1) in the Heckscher-Ohlin type of the two-factor, two-commodity model, a transformation curve is actually very close to a negatively sloped-straight line whether factor market distortions exist or not, (2) factor market distortions will decrease the economic welfare not because of a shrinkage of the transformation curve, but because of a divergence of private from social opportunity costs in production, and (3) contrary to the Heckscher-Ohlin theory of trade pattern, each country will actually tend to specialize completely after trade if factor intensity differentials are not extremely large between the two industries.