Economic Theory Analysis: Heckscher-Ohlin Theory
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How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?
The Heckscher-Ohlin theory demonstrates how trade affects the distribution of income within trading partners. Explain.
How does the Leontief paradox challenge the overall applicability of the factor-endowment model?
According to Staffan Linder, there are two explanations of international trade patterns?one for manufacturers and another for primary (agricultural) goods. Explain.
Following that speech, the audience asks you to respond to the following question:
Describe a specific tariff, an ad valorem tariff, and a compound tariff. What are the advantages and disadvantages of each?
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Solution Summary
This solution describes the Richardian and Heckscher-Ohlin theories.
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How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?
Each country can supply different goods because of technological differences and resource availabilities. The technological difference is explained by the Ricardo's theory of comparative advantage and resource and endowments differences are explained by Heckscher-Ohlin model. Heckscher-Ohlin theory tells us that factor endowments matter. The relative abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor-abundant country and vice versa. If countries don't trade the relative prices of these sources will decrease. If the trade is allowed countries will sell their products to the markets that have higher price. On the other hand in the Ricardian theory, labor is the only source and all gains from the trade go to labor. Countries export goods that they can produce at lower opportunity costs which is called specialization. Briefly trade occurs because technology varies from country to ...
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