Application Letter
Adam Smith's model
Adam Smith displays trade taking place on the basis of countries exercising absolute advantage over one another.
Ricardian model
The law of comparative advantage was first proposed by David Ricardo.
The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.
The Ricardian model makes the following assumptions: 1. Labor is the only primary input to production 2. The relative ratios of labor at which the production of one good can be traded off for another differ between countries and governments
Heckscher-Ohlin model
Main article: Heckscher-Ohlin model
In the early 1900s a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher-Ohlin model (H-O model). The results of the H-O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply.
In the Heckscher-Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.
The H-O model makes the following core assumptions: 1. Labor and capital flow freely between sectors 2. The amount of labor and capital in two countries differ (difference in endowments) 3. Technology is the same among countries (a long-term
Adam Smith displays trade taking place on the basis of countries exercising absolute advantage over one another.
Ricardian model
The law of comparative advantage was first proposed by David Ricardo.
The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.
The Ricardian model makes the following assumptions: 1. Labor is the only primary input to production 2. The relative ratios of labor at which the production of one good can be traded off for another differ between countries and governments
Heckscher-Ohlin model
Main article: Heckscher-Ohlin model
In the early 1900s a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher-Ohlin model (H-O model). The results of the H-O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relative short supply.
In the Heckscher-Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.
The H-O model makes the following core assumptions: 1. Labor and capital flow freely between sectors 2. The amount of labor and capital in two countries differ (difference in endowments) 3. Technology is the same among countries (a long-term