Endowment Theory Hecksher-Ohlin-Samuelson Account North-South Economic Relationships  Essay

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Endowment Theory (Hecksher-Ohlin-Samuelson) account North-South economic relationships? Illustrate point(s)

Generally speaking the world is economically divided into two blocks; North and South. North is characterized by stronger, more stable and powerful economies whereas south constitutes the less developed, weaker nations. 1 One of the popular economic arguments is that although North encompasses the major economies of the world which dominate the important institutions but South cannot be overlooked as it consists of the bulk of inhabitants. The world cannot ignore the importance of south due to certain emerging powers of the North like China, Brazil, and India. However, in this radical world where every state is independent and there is absolutely no self-governing power keeping an account of the governments, the hegemonic, influential and powerful countries similar to the United States of America (USA) will not ever leave their central place in the world.

The bargaining power of the countries in the south is increasing vigorously as predicted by some experts. However there are others who propose that the asymmetrical interdependences in today's economic situations will not crop major amendments in North-South bargaining power in the future.

The international theory of trade that has been developed from the writings of Heckscher and Ohlin basis the idea of twin observation and differentiates the countries on the fact of their endowment composition whereas on the other hand productive activities are being distinguished on the basis of relative intensities that requires factors.

There are four basic theorems of the Heckscher-Ohlin-Samuelson (HOS) model:(i) the Factor Price Equalization theorem concentrates on the conditions under which trade in products is a perfect substitute for the international mobility of factors, (ii) the Stopler Samuelson theorem focuses on conditions under which a change irrelative commodity prices has an clear-cut effect on real factor returns, (iIi) the Rybczynski theorem shows how a change in factor supply alters production, holding all prices., and (iv) the Heckscher-Ohlin theoremshows the relation between relative factor endowments and comparative advantages. The model given by HOS gives an explanation regarding the trade which is generally based on difference of relative factor endowment that gives countries across the world opportunities to get benefit from the existing resources (Markusen, 2000).

According to the factor price equalisation theorem that at times of equalized price between different countries while they opt to move for free trade at the same time the prices of factors will also be equalized between countries.This implies that free trade will equalize the wages of workers and the rents earned on capital throughout the world.

There is a rise in calls for protectionism -- unskilled workers in the developed countries are apprehensive about competing with the unskilled workers in developing countries as they expect that free trade will end in lower wages for them. Advocates of factor price equalisation theory assert that it is most clearly seen in studies of North-South trade over the past 30 years. Studies show that the rising premiums in the U.S.A. were a result of trade with the South that depressed the wages of low-skilled workers in USA. It thus appears that the idea of factor price equalisation provides a rationale for adopting protectionism and thus creates a major proactive measure for the organisations (Helpman, 1984).

The real wage of the unskilled labour in the North reduced due to the North-South trade as evidenced by Stolper Samuelson Theorem. However the fact also remains clear that the trade with South have negatively affected the wages in North. The case no longer has its existence that if the trade partner is poor the trade is more harmful for Northern wages. The impact of negative wage is largest in the South as the South has an intermediate capital labour ratio being the more efficient producer. It also results in largest aggregate welfare gains from the trade in North. Although the South also gains from the trade and the trade seems to be relatively larger with the extreme factor composition. Capital accumulation is important for the welfare even if the poorest country is gaining from the trade.

The theorem stated by Rybczynski states that at times of full employment the endowment affects the output of the goods. Thus precisely it can be said that with the increase in country's endowment the output of the good will also increase as the factor uses it intensively and will result in decrease in output of the other good. The output of the capital intensive good will increase and labour intensive good will decrease as the capital endowment rises, according to Rybczynski theorem. This can be used by North- South economies as the dynamics of labour and capital. Thus North with high capital can import goods that are labour extensive and export goods that are capital extensive to the South as the supple of these goods is larger in North (Markusen, 1995).

The theory presented by Eli Heckscher and Bertil Ohlin on international trade and factors of endowments mainly focuses on the relationships between the composition of countries' factor endowments and commodity trade patterns as well as the consequences of free trade for the functional distribution of income within countries. The two most pertinent factors of production of the Heckscher-Ohlin theory are labour and capital. The idea basically revolves around the assumption that states will export goods that utilize their profuse and low-cost element(s) of manufacturing and import goods that use the countries' limited resources. Most countries in the north are relatively affluent with capital; the classic worker has sufficient machinery and utensils to help with the labour. In such nations salaries are high resulting in a high cost of producing labour-intensive goods -- such as textiles, sporting goods, and simple consumer electronics -- tend to be more lavish than in countries in the south who have abundant labour and low wage rates. On the other hand, goods requiring much capital and less labour (automobiles and chemicals, for example) are inclined to be relatively inexpensive in the north with plentiful and cheap capital. Hence this would be beneficial for the countries in the North to produce capital intensive goods that are relatively inexpensive as they have abundant capital. Exporting these goods would ultimately benefit them to import goods that are labor intensive.

According to the theory of Heckscher and Ohlin it is not the absolute amount of capital that is important but it is the amount of capital per worker that matters. For instance a small country like Luxembourg has lesser capital than that of India, but in contrary it has more capital worker. Thus the theory of Heckscher-Ohlin predicts that it will be profitable for the Luxembourg to export capital intensive products to India and import labour intensive products in return. In the actual pattern of international trade the theory of Heckscher-Ohlin is frequently different apart from its plausibility. As an explanation of what countries actually export and import, it is much less accurate than the more obvious and straightforward natural resource theory.

There are three moderately overlying stimuli for the growth of Research and Development in the South: (a) leveraging on the knowledge and experience obtained from production activities in the same or related industries benchmarking them to the ones in the north; (b) the lower cost of R&D, owing to the availability of a large pool of scientific and technical manpower (or a large patient base, as in the case of drug trials);and (c) proximity to markets in the South, especially to large markets such as in China and India, and the development and customisation of products to best suit customer tastes in these markets.

Southern countries such as South Korea, Taiwan, China, India, and Brazil have progressed from the creation of increasingly sophisticated goods and services to the behaviour of R&D in the same or related product lines. Their objective is to…

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