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.
He then, states that the number of jobs lost barely even put a dent in the number of jobs produced by trade. Another important issue of the trade system is that the people who get rich from trade, keep getting richer while the poor stay poor. This is partially solved by protectionism (taxing imports), although it slows economic growth in the long run and protects some of the jobs that would be lost in the short run. To help understand the price of trade barriers, he explains this by stopping trade across the Mississippi River. This shows that the east side would then have to stop producing their goods and spend some of their time producing what the west side used to export. Although, there would be an increase in jobs, it would not be efficient because they are not using specialization to their full advantage. The author then moves on to the point that trade lowers the price of goods, due to it being cheaper to produce in other areas. He portrays this by showing why Nike can produce shoes in Vietnam instead of the United States. He further elaborates his point by proving that trade helps poor countries as
The trend toward a more globalized market has become increasingly developed in the latter half of the 20th century. Emphasis on world trade has become a dominant figure in almost every Nation’s economy. Between 1970 and 2000 world trade has experienced an increase of almost 370 percent. Concurrently, world GDP increased by 150 percent. Trade is beneficial to Nations because it allows the creation of avenues that aid in efficient allocation of resources (Canas & Coronado). Countries can gain from trade when they specialize according to their comparative advantage. This is, when they create conditions where goods and services can be produced at a lower opportunity cost than in any other country. Along the same logic, countries can also make large profits by taking advantage of another countries comparative advantage.
...ystem primarily responsible for promoting global competition. Free trade also promotes shifts in production so as to fit the “comparative advantage” model. Though free trade is widely practiced concerns with how to regulate free trade, something supposedly unregulated, countries have to subject themselves to the controversial institutions of the IMF and WTO. Fair trade policies while potentially creating smaller markets support workers’ rights in both the U.S. and developing nations. Though the pros and cons of globalization continue to be debated the United States can no longer escape its role in the global economy nor can it impose policies that are detrimental to the United States founding ideals. However policies that play towards the advantages of both free and fair trade could stimulate a healthy domestic economy that is also competitive in the global market.
In the pre-World War I period the data show us that the majority of the international trade were represented by dissimilar goods traded between developed and developing countries. More precisely, home developed countries like United Kingdom or Spain who owned enough capital for manufacturing, traded with developing countries (colonies) that were rich for natural resources but lacked the capital for manufacturing. The majority of the international
Economic interdependence has become a main complex issue in recent times, often resulting in strong and uneven impacts among nations and within a given nation. Economic interdependence is a consequence of specialization. Whitman, cited by Baldwin, further expands and proposes that economic interdependence should also involve the degree of sensitivity of a country’s economic behavior to policies and development of countries outside its border. However, empirical evidence to support the latter definition is a lot harder to find, given its ambiguity. Even though specialization will give comparative advantage, which is the ability of a firm or individual to produce goods or services at a lower opportunity cost than other firms or individuals, economic interdependence will scare some countries to specialize in something and dependently import something else from the other countries. In conclusion, interdependence will contribute imperfect specialization in international trade.
In running our personal affairs, virtually all of us exploit the advantages of free trade and comparative advantage without thinking twice (Blinder). Free trade essentially introduces new technologies to 3rd world countries and helps them develop a stronger economy and find a new quality of life. The advantages of free trade are described by the theory of comparative advantage, which defined means a lower relative cost of production than someone else. With this as long as each country specializes in products that it has a comparative advantage in, ...
Krugman defines comparative advantage as “the view that countries trade to take advantage of their differences” (1987, p. 132). Comparative advantage theories assume constant returns to scale and perfect competition. Krugman writes that trade exists when countries differ from one another in goods they have to offer, technology, or factor endowments. Although there are multiple models explaining the cause of trade, each differs as to what factors are included to explain why trade takes place. Economist Ohlin and authors Burenstam-Linder and Vernon began introducing counter-points to comparative advantage as early as the late 1950’s, saying that formal models of comparative advantage did not take into account all factors affecting international trade. International specialization and trade caused by increasing returns, as well as economies of scale and techn...
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:
The Linder hypothesis, for instance, asserts that demand is more significant than comparative advantage in trade, and nations with the same demand will be more likely to trade. For example, both of the United States and Japan are developed countries with considerable demands for cars as well as strong automotive industries. Both nations trade diverse brands of cars to each other, instead of dominating the industry of other country with comparative advantages. In the same way, New Trade Theory states that factor endowments variation can separately develop comparative advantages.
1.) Comparative advantage speaks about win-win situation for countries in trade but there are many criticisms regarding comparative advantage theory such as consideration of trade costs, import substitution industrialization and also criticism from a economist Ha- Joon Chang speaking about Technology making Developed countries rich and Developing countries as it were form past. Our Question is based on criticism made by Ha- Joon Chang i.e. developed countries maintain relatively advanced technology and industry compared to developing countries which lead to countries with good technology to export and become richer and countries with low technology lead them to become more poor by importing.
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.
In order to understand bilateral trade relation between India and Central Asia and its potential the Gravity Model was used. The gravity model is a simple model that has been extensively used to study bilateral trade patterns and determinants. The main objectives of model are the GDP of countries and distance between countries. The GDPs of the two countries represent the size of the economies that indulge in bilateral trade. In the country of export, the GDP reflects the output of the economy and acts as a proxy for the production capabilities. In contrast, GDP represents the income in the importing country. It denotes the size of the market for commodities - countries with a higher GDP are likely to have a greater demand for goods in the international market. In its simple form, the gravity model suggests that bilateral trade between two countries is directly proportional to the GDP of both the nations and inversely proportional to the distance between them.
Firstly, what should be noted here is that international trade has been providing different benefits for firms as they may expand in different new markets and raise productivity by adopting different approaches. Given that nowadays marketplace is more dynamic and characterized by an interdependent economy, the volume of international trade has grown substantially in recent years, reducing the barriers to international trade. However, after experiencing the economic crisis that took its toll in 2008 many countries adopted a different approach in terms of trade barriers by introducing higher tariffs in order to protect domestic firms from foreign competition (Hill). Secondly, in order to better understand the implications of the political arguments for trade it is essential to highlight the main instruments of trade policy (See appendix 1).
Inter-industry trade is one-way trade of different goods while intra-industry trade is two-way exchanges of similar goods. Moreover, inter-industry trade is a trade of products in different industries. Intra-industry trade, on the other hand, is a trade of products in the same industry. According to Forstner and Balance (1990), theses intra- and inter-industry trade models are based on different theories, because inter-industry trade is based on the comparative advantage theory and factor endowment, but intra-industry trade is based on the principle of economies of scale and imperfect competition. Countries usually engage in inter-industry trade, for instance, the trade of footwear products produced in China with technological equipment produced from the United States. Inter-industry specialisation would increase real incomes within a nation, but intra-industry specialisation would bring down prices, this in turn higher real incomes, and particularly increase varieties of goods available for consumers (Grimwade,
The Law of Comparative Advantage was introduced by David Ricardo in 1817 in his book ‘Principles of Political Economy and Taxation’. According to this classical theory, a comparative advantage exists for a country when it has a margin of superiority in the production of a certain commodity over others. Comparative advantage results from differing endowments in the factors of production like technology, natural endowments, climate, etc. among different countries. Therefore, each country exports the commodities which it can produce at a lower opportunity cost or, in other words, lower marginal cost of production and imports the rest. This would ultimately be beneficial for all countries engaging in free trade as each would gain through its specialization