In the Heckscher-Ohlin model o
The Heckscher-Ohlin model of trade, proposed by two Swedish economists Hecksher and Ohlin, is based on the differences of factor requirements in commodities and difference in relative factor endowments. It believes that these factors explain the cause of trade. According to the Heckscher-Ohlin theory, it predicts that countries will export those goods that make intensive use of factors of production, which are locally abundant, while importing goods that make intensive use of factors that are locally scarce (Salvatore, 1995). It extends the trade model to examine the basis for comparative advantage and the effects that international trade have on factor earnings in the nations. This essay will focus on how the Heckscher-Ohlin model of trades determines a country's comparative advantage. As an example of this model, two countries will be analysed, particularly on change patterns of trade in the country. Finally, this essay will outline briefly the alternative models that can be used under the same condition.A few basic assumptions of the Heckscher-Ohlin model or known as "2x2x2" model because of the assumption that there are two countries with different factor endowments with two homogenous factors labour and capital, as the
There are few models of alternative theories of trade yield due to other factors not accounted for by the standard Heckscher-Ohlin model. The first factor is technology theories, which are extracted from Imitation Lag Hypothesis and Product Cycle Hypothesis. For Imitation Lag Hypothesis, it examines the implications of allowing for delays in the diffusion of technology across country borders. It assumes that the same technology is not always available in all countries. An example using Australia and China where we assume that Australia has a comparative advantage in research and developments and tends to export technologically advanced manufactured goods. The Product Cycle Hypothesis suggests three product stages (new product, maturing product, and standardised product). The trade occurs when this hypothesis can postulate a dynamic comparative advantage because the country's source of export shifts from leading developed countries as the product moves from its introduction to maturity and standardisation. The implications of this theory will effect a developing country which in this case is China in that it will be confined to exporting older products as opposed to new high-technology goods. What determines a country's comparative advantage? Comparative advantage is a principle which stated that it will pay the country to produce more of those goods in which it is relatively more efficient and to export them in return for goods in which its relative advantage is least. The assumptions that have previously been outlined need to be analysed in order to explain the determinants for a country's comparative advantage using the Heckscher-Ohlin model. When there are two countries with different relative prices in autarky, then there is a basis for trade because of different factor endowments. In other words, factor endowments determine what country should produce and export and what it should import. Thus, the difference in factor endowments (in the face of equal technology and taste) is a basic determina
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Approximate Word count = 1359
Approximate Pages = 5 (250 words per page double spaced)
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