International Trade Relations

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The Heckscher-Ohlin theory of comparative advantage was produced as an alternative to the Ricardian model and had an ideological mission: the elimination of the labor theory of value and the incorporation of the neoclassical price mechanism into international trade theory. The empirical validity of the Heckscher-Ohlin model and argues that most of the empirical work aimed at proving the validity of the model by focusing on its power to predict trade patterns is irrelevant. Moreover, the dynamic version of the model, which predicts dynamic structural change in the long run, is based on simple empiricism. Secondly, it exposes the theoretical weaknesses of the model by questioning its treatment of capital and labor. Finally, it challenges the view that the model surpasses the Ricardian model in its ability to predict patterns of trade between low- and high-income countries by demonstrating that the Ricardian model would also anticipate similar trade patterns.

The wider discipline of trade theory within which we find the field of input-output economics consists of four broader areas. Input-output economics, based on the Heckscher-Ohlin theory and defined by the findings of Wassily Leontief forms the biggest most well known part. The Ricardian model, which is the next most important model to that on which input-output economics is based, will be described in some depth for the sake of comparison and to give an alternative insight into the discipline of trade theory.

The Ricardian model then, suggests that labor costs will be the determinant of trade: the country with the lower labor cost in the production of a good will be the exporter of that commodity. This theory was tested in 1952 by MacDougall who used data on 25 products from 1937 to compare labor productivity and exports for the United States and Great Britain. In this way, MacDougall tested whether their relative exports to third countries were connected with their labor productivities. The results which MacDougall found were inconsistent with the simple Ricardian model. However, they are generally interpreted as supporting a more general "Ricardian" argument that differences in relative labor productivities are the determinant of comparative advantage. As long as these differences are due to technology, the model exists as an alternative to the model described previously.

MacDougall found that wage rates in the manufacturing sector were roughly twice as high in the United States as in Britain. Therefore, the United States should be the dominant exporter in markets where her labor productivity was more than twice as high as in Britain.
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