HO vs Ricardian Trade Theory
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As an international economist you have been asked to prepare a short speech which answers the following questions:
1. How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?
2. The Heckscher-Ohlin theory demonstrates how trade affects the distribution of income within trading partners. Explain.
3. How does the Leontief paradox challenge the overall applicability of the factor-endowment model?
4. According to Staffan Linder, there are two explanations of international trade patterns - one for manufacturers and another for primary (agricultural) goods. Explain.
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Solution Summary
Explanations of international trade patterns based on different theories.
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1. The Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods when free trade is permitted. The tariff would prevent this specialization to the detriment of consumers. Depending on where the tariff is distributed, the government and domestic producers would gain what the consumers had lost. Some welfare is lost due to market inefficiencies as a result of the tariff.
The Heckscher-Ohlin Model predicts that free trade between countries would permit those with abundant unskilled labor to have the advantage in goods which are intensive in unskilled labor while countries whose strengths are in capital and skilled labor would have the advantage in other goods. If the prices of the output goods are equalized between countries as they move to free trade, then the prices of the ...
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