Question

Can you explain how the heckscher ohlin model affect the GDP in relation to central government debt?

Answer 1

According to the Heckscher-Ohlin (H-O) theorem a country specializes in the production and exports that good which intensively uses the most abundant factor of the country. In other words, trade is determined by the factor endowments of a country.

Now, suppose the central government is running high debt, then in order to finance it the government needs to borrow from the market. If the country has abundance of capital then the high debt of the central government will adversely affect the competitiveness of the country in international trade.

This is because high government debt means that the government is selling its securities to finance its expenditure. In order to make people buy the securities the government needs to offer higher interest rate. The increase in the interest rate raise the cost of capital in the country.

The increased cost of capital will create hinderance in specializing in the production of capital intensive goods in the country as it is abundant in capital. This will negatively affect the gross domestic product (GDP).