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International Economy and Trade: The Answer to Heckscher-Ohlin Theory

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.

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Answers:

1) How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?

Heckscher Ohlin theory states that the immediate cause of international trade is the difference in relative commodity prices caused by differences in relative demand & supply of factors (factor prices) as a result of difference in factor endowments between two countries. Fundamentally the relative scarcity of factors ? the shortage of supply in relation to demand is essential for trade between two regions. Commodities which use large quantities of scarce factors are imported because their prices are high, while those using abundant factors are exported because their prices are low.

Ohlin theory was considered to be superior to the Ricardian theory on the following grounds.

a) Ohlin theory regards international trade as a special case of interregional or inter-local trade as distinct from the classical theory which considers international trade totally different from domestic trade.

b) The Ohlin model takes two factors- labor & capital, while the Ricardian model considers only one factor of production as labor.

c) Ohlin theory regards differences in factor supplies as basic for determining the pattern of international trade while the Ricardian theory does not take note of it.

d) The Ohlin model is considered to be more realistic because it is based on the relative prices of ...

Solution Summary

Heckscher-Ohlin theory is clarified in approximately 800 words.

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