Question

What do the basic models of international factor movements between two countries predict with regard to the impact on factors from each country and overall output? In reality are the results the same as would be predicted in this model? If they are different, explain why this is the case.

Answer 1

The basic models of international factor movements between two countries predict the commerce patterns of a country based on the production factors available. They help predict the trade pattern between the countries. An example of such model is the HO Model which states, a country with higher labour availability (factor of production) must produce more of labour intensive products and the countries with higher capital availability must produce capital intensive products.

Then, a country with more capital can export these capital intensive products can import more labour intensive products. One must note that these endowments are relative and not absolute for countries in question.

But, in reality these prediction do not seem to be valid, i.e. it gets violated. Leontief Paradox can explain this better. For example, US which is more capital abundant should ideally export capital intensive products and import labour intensive products but is exporting goods which are more labour intensive like the software products which need more labour in terms of making and upkeep.