International Trade Relations International Trade:

International Trade Relations

International trade: Questions

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

According to the Ricardian theory of trade, "only one factor of production, labor, is needed to produce goods and services. The productivity of labor is assumed to vary across countries, which implies a difference in technology between nations. It was the difference in technology that motivated advantageous international trade in the model" (Suranovic 2006). The Heckscher-Ohlin model offers a more realistic model of trade, as it incorporates another critical factor into how the balance of trade develops -- that of capital. The Heckscher-Ohlin model assumes that "labor and capital are used in the production of two final goods. Capital refers not just to money, but also to the physical machines and equipment that is used in production. Thus, machine tools, conveyers, trucks, forklifts, computers, office buildings, office supplies, and much more, is considered capital" (Suranovic 2006).

Question

The Heckscher-Ohlin theory demonstrates how trade affects the distribution of income within trading partners. Explain the Stolper-Samuelson theorem of the Heckscher-Ohlin theory "describes the relationship between changes in output, or goods, prices and changes in factor prices such as wages and rents" and how they affect the income of workers and capitalists within a country" engaged in free trade (Suranovic 2006). If the price of the capital-intensive good rises in value, such as a computer system, the rent of an office complex, or other supplies, then the price of capital, the factor used intensively in that industry, will rise, while the wage rate paid to labor will fall with the subsequent rise in the demand for capital. "Thus, if the price of steel were to rise, and if steel were capital-intensive, then the rental rate on capital would rise while the wage rate would fall. Similarly, "if the price of the labor-intensive good were to rise then the wage rate would rise while the rental rate would fall" as labor would be more in demand (Suranovic 2006). As free trade encourages specialization and greater efficiency of economic resources, redistribution of wealth (for better or for ill) is inevitable. Nations with more success at exporting labor or capital-intensive goods will favor those industries, and the prices of wages and capital will either rise or fall accordingly.

Question

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

According to Leontief, despite the fact that the U.S. has an "abundance" of capital, its exports were labor intensive and imports were capital intensive (Leontief paradox, 2009, Economy professor). Leontief believed this was because American workers were efficient than foreign workers, up to three times as much, because of America's superior economic organization and economic incentives in the U.S." (Leontief paradox, 2009, Econ 355: Lecture Notes).

Question

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

To resolve the Leontief paradox, Linder proposed a demand-side theory of international trade, suggesting that nations with similar demand patterns develop similar industries, and this is how an international marketplace with differentiated goods develops. Consumers with similar levels of income have similar tastes, and the more affluent the nation, the smaller the proportion of income consumers spend that income on primary (agricultural) goods (Bonham & Nilsson 2006, p.1)

Question

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

A specific tariff is levied upon an item as determined on a per unit basis, such as weight, number, length, volume or another unit of measurement. They are usually levied on foods, raw materials, and other input goods but can become prohibitively high and start a trade war if prices fall, making it highly unprofitable for a nation to export its goods (Tariff barriers, 2000, Secrets of International Trading). In contrast, an ad valoreum tariff is calculated as a percentage of the monetary value of the imported goods "for example, 10, 25 or 35 per cent" and has the advantage of the tariff being able to keep pace with the rate of inflation (Tariff barriers, 2000, Secrets of International Trading).