Question

Question 1

(a) Interpret the prediction of Hecksher-Ohlin theorem on international trade in the exports and imports.

(b) Determine three (3) critical assumptions of a simplistic and specific version of Hecksher-Ohlin theory for gains in trade, which can be challenged as not true in the real world?

(c) Demonstrate why the highly restrictive assumption of Hecksher-Ohlin theorem that determines the pattern of international trade, which is also referred to as the factor proportion theory, is also deemed as unrealistic?

Answer 1

(a).  Heckscher-Ohlin helps us to predict a country's pattern of trade based on its endowment of factors of production. A country pattern of trade is its composition of what is it exporting and what is importing. What kind of factors of production does the country have labor, capital and in what proportion is Endowment of factors of production? in particular, the H-O theorem helps us predict what kinds of goods and services does a country is going to export and import. for example,

there are two countries: country M and country N, these two countries produce 2 goods let us assume that good P and good Q, the two factors of production use in theses two countries are Labour (L) and capital (K).

if Km/Lm > Kn/Ln, the following expression shows that country M is the capital abundant country, here we have more capital relatively compared to labor.

if the above expression true then Lm/Km < Ln/Kn is also true which shows that in-country N there is more labor per capital compared to country M, country N is relatively labored abundant country.

if this inequality is true then we can say that country P is relatively capital intensive goods.

Kp/Lp > Kq/Lq, tell that the amount of labor used in the production of one unit of P if this equation is true then,

Lp/Kp < Lq/Kq, Q is labor-intensive good.

notice that, the intensive is a characteristic of goods, while abundant is characteristic of countries. capital abundance a country export capital intensive good and import labor-intensive good and similarly labor-intensive country will import capital abundance and export labor abundance goods.

(b). 1. fractional harmony examination, This theory attempts to explain the case of trade simply dependent on factor degrees and factor powers, while ignoring a couple of various effects, for instance, transport costs, economies of scale, external economies, etc., which additionally apply impact on the cost of creation.

2.  Static Analysis, It implies the hypothesis examines the example of worldwide exchange in a static setting. The ends drawn from such an examination are basically not significant to a unique monetary framework.

3. Disregard of Technological Change, There has been a constant improvement in procedures of creation both in the progressed and the less evolved nations. The disregard of innovative change in the H-O hypothesis makes this model very conflicting with real reality.

(c). The H-O model accepts that the main contrasts between nations are these varieties in the general gifts of components of creation. It is eventually demonstrated that exchange will happen, the exchange will be broadly favorable, and exchange will effectively affect costs, wages, and leases when the countries contrast in their relative factor gifts and when various ventures use factors in various extents.