The Heckscher-Ohlin (H-O) model is a general equilibrium model that shows the impact of different ownership of resources by countries on the trade (Feenstra & Taylor, 2011). This model shows a long-run effect as all factors of productions can move freely. Various assumptions are made in this model, including:
1. Free trade
2. Identical technology level of trading partners,
3. Identical and homothetic preferences
4. Ability of factors to move freely between industry
The H-O theorem states that a country will export the good that uses intensively the factor of production it has in abundance, and will import the other good. This report will first review the imports and exports pattern between two selected countries-Australia and Indonesia. Next, analysis on the resources endowments of the two countries will be compared with the trade patterns. Based on our findings, conclusions will be made as to whether the H-O Theorem stands up to its main predictions. Lastly, any major differences in trade patterns will be discussed theoretically.
Current Prediction
As shown in Table 2 (see appendix), Australia’s capital to labour ratio is more than 10 times higher than Indonesia’s. Based on H-O model, we would expect to see Australia exporting more capital-intensive goods than Indonesia. Furthermore, developing country like Indonesia is often associated with having a large pool of cheap labour, compared to developed nation like Australia. Trade pattern will not only be examined by using capital and labour as factor of productions only. Resources abundance and environment play a part too.
Analysing Trade Pattern
Table 1 (see appendix) shows the 10 main principal imports and exports of Australia with Indonesia for the year 201...
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...n is insufficient.
Conclusion
Firstly, we have to acknowledge that any conclusions reached are based on many assumptions and an understanding of the inherent mistake of the data.
Overall, we can say that Australia is more capital abundant than Indonesia. Australia’s exports are mainly on capital-intensive agriculture goods. As a developing country with abundant and relatively skilled labour, Indonesia’s could manage to exports both capital and labour abundant goods. We also observe the incidence of intra-industry trade in some mining goods like crude petroleum.
Unexplained trade pattern that is not consistent with H-O Theorem was observed and more information regarding both countries functioning is needed. However, we can conclude that H-O Theorem is accurate and countries are exporting goods that use the factor of productions they are abundant in.
After Sir John McEwen, the former Minister for Trade, signed the Australia-Japan Commerce Agreement in 1957, the trading aspect between the two nations has developed ...
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Few governments will argue that the exchange of goods and services across international borders is a bad thing. However, the degree to which an international trading system is open may come into contest with a state’s ability to protect its interests. Free trade is often portrayed in a good light, with focus placed on the material benefits. Theoretically, free trade enables a distribution of resources across state lines. A country’s workforce may become more productive as it specializes in products that it has a comparative advantage. Free trade minimizes the chance that a market will have a surplus of one product and not enough of another. Arguably, comparative specialization leads to efficiency and growth.
"Australia." Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. N.p., n.d. Web. 2 Dec. 2013. .
This economic growth continued to increase through ‘98 and ‘99, partly being attributed to the weakening Australian dollar that allowed for the opening up and increasing market shares held by Australian exports on world markets. This was the case, as the reduction in the Australian dollar’s value, triggered decreases in the prices of our exports for foreign buyers, thereby increasing demand for our products and increasing the amount of money and investments coming into Australia. This therefore resulting in the aforementioned increases economic growth when combined with the high levels of employment and consumer confidence.
One of the main factors that caused globalisation in Australia was a reduction in protection, the act of National trade barriers being removed. A reduction in protection of international trade is done by governments who work together to develop agreements with each other to reduce trade barriers and allow tariffs on imported goods to be reduced. Australian governments have been involved with countries such as Singapore and Malaysia in an effort to help reduce the tariffs and quotas on imported goods, resulting in free trade agreements between other countries. For example, when National trade barriers are removed, opportunities are opened up to Australian business to import goods at a cheaper price and then export other goods to new markets in other countries. Evidence of this was recently reported on the ABC news program, the reporter quoted that ‘our government should not sign any free trade agreements with Japan, until the tariffs on Australian beef and dairy products are reduced.’ This news report showed local Australian farmers who are trying to convince our Prime Minist...
...stinguish that a qualitatively new type of worldwide trade was developing. The illustration in United stated since the late of 1980 showed that “has less productive portions moved offshore which lead to a decrease in employment while maintaining higher value-added parts. Consequently, all the productivity has risen, while the tradable sector has increased employment” (Spence and Hlatshwayo,2011).
The PCA is an agreement in many sectors, for instance migration, education, energy, and custom cooperation partner. The trade flow of goods were worth 14.3 billion European dollar for the EU and 9.7 billion European dollar for Indonesia. Foreign Direct Investment (FDI) reported that the EU ranked as the third largest investor in Indonesia in 2012, with 1.8 billion European dollars revenue. The products which Indonesia exported to the EU were 19 percent of cleavage products, 9.3 percent electrical and electronic equipment, 8.4 percent textiles, 8.3 percent rubber, and 49.7 percent others. On the other hand, the products exported by the EU to Indonesia were 28.5 percent machinery, 13 percent electrical and electronic equipment, 6.5 percent articles of iron or steel, 4.9 percent vehicles other than railway and
The article examines some of the influential theories in the domain of international trade including hyperglobalisation and comparative advantage. The publisher was keen to demonstrate how the theories need to be embraced since hyperglobalisation promotes investments flows from partners pursuing such trading agreements. The trading partners can still reduce their operation cost such as transportation while still navigating the complexities of hyperglobalisation. The author also endeavored to demystify the terminology of comparative advantage by issuing examples and previous concerns reported on the subject. It has been hailed that the traders often traded as per their factor endowments by concentrating on spheres of their specialty. The author also hinted to the readers that the theory of comparative advantage is a major concept since it is the first theory that economics students are briefed on. Arguments in support of the theory reveals that countries that have this level of visibility stand to benefit massively once they specialize in areas of their specialty. He purp...
The prices of primary products in the international markets are very low hence the producers are not compensated for their efforts. After being processed into finished products by other nations, the final commodities are imported into the country at a very high price. This implies that in most cases, other countries are the ones who benefit from the raw materials produced in the primary industries in Australia (Peters et al., 2010 1330). The government of Australia should improve its manufacturing industry so that it can process raw materials domestically and export the finished products. This will enable the country to benefit from its primary industry more than it could when exporting the raw commodities.
Sisouphanthong, B., & Myers, C. N. (2006). Retrieved Octobe r26 2011, from INTERNATIONAL TRADE: http://www.undplao.org/whatwedo/bgresource/humandev/UNDP-NHDR06c.pdf
Another form of regulation of trade is the imposition of policies which do not favor exports such as introduction of quotas and requirements of licensing. The volume of trade of the primary goods is limited by the quotas and this has a negative effect on the gross domestic product. In the long run, the economic growth of the developed countries is slowed by lack of income (Das, 2004).