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    International Trade Theory

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    Contrast several trade theories: Ricardian Model, Heckscher-Ohlin Model, Leontief paradox and the Linden model. How does each challenge the other and improve on previous work?

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    The assignment analyses how the Heckscher-Ohlin theory differs from Ricardian theory in explaining international trade patterns and how trade affects the distribution of income within trading partners. In addition, we consider how the Leontief paradox challenges the overall applicability of the factor-endowment model. An alternative explanation that accommodates both the Heckscher-Ohlin theory and the Leontief paradox is the Linder theory, which considers two trade explanations - one for manufacturers and another for primary (agricultural) goods. Finally, the paper describes a specific tariff, an ad valorem tariff, and a compound tariff and the advantages and disadvantages of each.

    Heckscher-Ohlin theory: its main assumptions, advantages and shortcomings.

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

    The Heckscher-Ohlin model incorporates a number of assumptions of the production process omitted by the simple Ricardian model.

    In explaining the production of goods and services, the simple Ricardian model needs only one production input - labor. In addition, the general thrust of the Ricardian model depends on the concept of the productivity of labor, which is assumed to vary across countries. This discrepancy in labor productivity across countries implies differences in their production processes and technologies, as well. Thus, it is the difference in technology that is the underlying cause for international trade in the model. (Appleyard and Field, 2001, p. 27)

    In contrast to the simple Ricardian model, the standard Heckscher-Ohlin model expands the number of factors of production from one to two - the model assumes that both labor and capital are used in the production function.

    The assumption of two productive factors, capital and labor, allows for the introduction of another realistic feature in production; that of different factor-proportions both across and within industries. When one considers a range of industries in a country, it is easy to convince oneself that the proportion of capital to labor used varies considerably. For example, steel production generally involves large amounts of expensive machines and equipment spread over perhaps hundreds of acres of land, but also uses relatively few workers. In the cotton industry, in contrast, harvesting requires hundreds of workers to handpick and collect cotton. Therefore, the amount of machinery used in this process is relatively small. (Mas-Colell, Whinston & Green, 1995, p. 544)

    In the Heckscher-Ohlin model, we define the ratio of the quantity of capital to the quantity of labor used in a production process as the capital-labor ratio. It is a standard assumption that different industries, producing different goods, have different capital-labor ratios.

    The Heckscher-Ohlin model is occasionally referred to as the factor-proportions model - it is this ratio of one factor to another that gives the model this generic name.

    In a model in which each country produces two goods, an assumption must be made as to which industry has the larger capital-labor ratio. Thus, if the two goods that a country can produce are steel and clothing, and ...

    Solution Summary

    International Trade Theory is summarized.