International Economics How Does the Heckscher-Ohlin Theory

International Economics

How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns?

In the Ricardian model only one factor of production, labor, is needed to produce goods and services (Suranovic). The productivity of labor is assumed to vary across countries, implying a difference in technology between nations. The difference in technology results in advantageous international trade. On the other hand, the Hecksher-Ohlin model uses two factors of production labor and capital (Carbaugh, 2004). Thus, this model accounts for differing factor-proportions both across and within industries. For example, if one country has a relative abundance of land while another country has a relative abundance of capital, the first country will have a comparative advantage in producing and exporting a land-intensive product while the second country would have a comparative advantage in a capital-intensive product.

The Heckscher-Ohlin theory demonstrates how trade affects the distribution of income within trading partners. Explain.

This theory assumes that the only differences between countries are relative endowments of factors of production (Suranovic). Trade will occur, trade will be nationally advantageous, and trade will have measurable effects upon prices, wages and rents, when the nations differ in their relative factor endowments and when different industries use factors in different proportions.

How does the Leontief paradox challenge the overall applicability of the factor-endowment model?

In 1954, Wassily Leontief applied a mathematical input-output model of the U.S. economy to 1947 trade data (Trade model extensions and applications). He found that the capital/labor ratio for U.S. export industries actually was lower than for U.S. import-competing industries. This finding was exactly the opposite of what the factor-endowment model would predict for the capital-abundant U.S. He also achieved similar results using 1951 trade data.

According to Staffan Linder, there are two explanations of international trade patterns -- one for manufacturers and another for primary (agricultural) goods. Explain.

Linder states that trade in primary products and agricultural goods conforms well to the factor-endowment theory (Boston University Global Trade Web site). However, he believed trade in manufactured goods required a different theory what he referred to as overlapping demand structures among nations. For manufactured goods, the basis for trade is stronger when the structure of demand in the two nations is more similar, which means, when the nations per capita incomes are similar.

Describe a specific tariff, an ad valorem tariff, and a compound tariff. What are the advantages and disadvantages of each?