International Trade Essay

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International Trade Essay I

Student ID: Name: Mark:

"The Heckscher-Ohlin Model suggests that the basis of comparative advantage lies primarily in a difference in factor endowments between countries, and that if countries enter into international trade based on that comparative advantage they will be better off in real terms." Explain the meaning and the implications of this statement. Illustrate your answer with the appropriate diagram(s).

Introduction

The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that utilize their abundant and cheap factor(s) of production and import products that utilize the countries' scarce factor

The 2×2×2 model
The original H-O model assumed that the only difference between countries was the relative abundances of labor and capital. The original Heckscher–Ohlin model contained two countries, and had two commodities that could be produced. Since there are two (homogeneous) factors of production this model is sometimes called the "2×2×2 model".

Assumptions of the theory
The original, 2x2x2 model was derived with restrictive assumptions, partly for the sake of mathematical simplicity. Some of these have been relaxed for the sake of development. These assumptions and developments are listed here. 1. Both countries have identical production technology

2. Production output must have constant Return to Scale
3. The technologies used to produce the two commodities differ 4. Labor mobility within countries
5. Capital mobility within countries
6. Capital immobility between countries
7. Commodities have the same price everywhere...
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