Question

Please compare and contrast the Ricardian Law of Comparative Advantage with the modern theory (Heckscher-Ohlin) of international trade.

Answer 1

• Ricardian theory of comparative advantage assumes there is only one factor of production - labor.

Hecksher-ohlin model assumes there are two factor of production - labor and capital.

• Ricardian theory assumes that in long run technology in countries changes, so the theory is applicable in short run.

Unlike Ricardian theory, hecksher-ohlin assumes that technology is same in countries in long run.

• The Ricardian theory emphasizes on comparative advantage. A country should specialize in production of a good in which they have a comparative advantage or, lower opportunity cost of production than the other country.

In hecksher-ohlin model, they assume a country produces goods based on the resources they have in abundance. A country which has more labor, will produce labor intensive goods and a country which has more capital will produce capital intensive goods. Then these two countries will trade with each other.

• Ricardian theory tried to demonstrate the gains from trade.

Hecksher-ohlin model tried to demonstrate the basis of trade.