Pattern of trade is guided by the factors of production
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In the Ricardian model, everyone seems to benefit from trade. However, the Heckscher-Ohlin model seems to show that some lose from trade as well. Who are the losers in the HO model, and how do they not benefit from trade?
Ricardo stated that countries specialize in producing those products which they produced best. Countries do not specialize in producing vast number of goods rather concentrate on only those in which they have maximum advantage.
He assumed that labor is the basic factor of production, its productivity is constant (MPL), is perfectly mobile in different sectors but not internationally, there exists perfect competition and limited amount of labor in the economy
The H-O theory advocates that countries should produce and export only those products for which they had abundance of factors of production and import only the products for which they are deficient in factors.
The Heckscher-Ohlin theory assumes that labor and capital move freely between different sectors, some products are labor intensive while others capital; there exists difference in the amount of capital and labor in different countries, the trade is free, same technologies exist in long term across the boundaries and tastes of the people are same
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Solution Summary
The Ricardian model emphasizes on theory of comparative advantage, viewed to be the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best.
The Heckscher-Ohlin theory states that countries should produce and export goods that require resources (factors) that are abundant and import goods that require resources in short supply.
The latter theory was an alternative to the former model of comparative advantage. However, Heckscher-Ohlin did not provide accuracy in its forecasts. Despite that it did present a remarkable solution from the theoretical point of view by adopting neoclassical price mechanism into the International Trade Theory
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Solution:
Ricardian Model:
The Ricardian model is about the difference in comparative advantage on the basis of technological differences that exist between different/two nations. Note- it is basically supply side, not *demand side, of these differences engaged in international trade. You may remember here that this model assumes that all other factors remain similar between the trading countries.
Other theories emphasize that trade is beneficial for some but not others.
Ricardian model states, that even a backward economy using inferior technology benefits from ...
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