Question

Explain why using the Ricardian model or the Hecksher-Ohlin model would not be particularly suitable for considering the benefits of the Closer Economic Relations (CER) agreement (a free trade agreement) between the Australian and New Zealand governments.

Answer 1

Ricardian model focuses on comparative advantage. The model suggests that the countries specialize in producing goods and services that they can do best .The model assumes that there is only one factor of production.According to this model trade takes place between two countries because of the differences in the productivity of labor due to differences in technology.

The Hecksher Ohlin model assumes  that there are two factors of production ie labor and capital.One country has comparative advantage over another because of the differences in relative amounts of each factor .According to the model the country should produce goods and export goods with the resources that is abundant and import goods that need resources that the countries have less.This model is different from the Ricardian model of comparative advantage as it lays stress on efficiency of production process.

The Australian New Zealand closer economic relations trade agreement is a free trade agreement between the two countries.This agreement resulted in the total elimination of tariffs between the two countries .If a good is sold legally in one country , it can be sold legally in another country too.A person who has registered to practice an occupation in one country may practice in another too.The Ricardian model and the Hecksher Ohlin model would not be suitable for considering the benefits of Closer Economic Relations which lays stress on free trade ,because Ricardian focuses on comparative advantage and HO model focuses on efficiency of producion process.