Question

how are the distributions of gains from trade changing as far as labor and capital are concerned? can we still use the h-0 model? The topic is about globalization inequality. Please type the answer. Thanks

Answer 1

With the expansion of trade since 1980s another element of International Trade has been observed and it is the increasing economic inequality both in the developing world as well as developed world. This fact is quite the opposite of the predictions made by trade theory based on comparative advantage and heckscher ohlin model. These theories suggested that countries that are equipped with large amount of unskilled labour should experience an increase in their wages related to the skilled labour which is not abundant.
The advent of globalisation has led to the reduction of trade barriers and an increase in trade and capital flows on the international level. Models earlier developed predicted that the relative abundance of factors of production will be their source of comparative advantage and countries that are abundant in one factor will specialise in the production of only those goods that are using those factors intensively. These models predicted that these relatively abundant factor will find their income level higher while the scared factor will lose from trade.
However evidence has total disagreement on Wage and income inequality that is increasing in developing countries especially among the unskilled labour which is the relatively abundant factor and supposedly the one which was expected to gain from trade. This correlation between increasing trade and increasing income inequality is not only a causality.
The reason for the differences in wages and increasing wage inequality is believed to be driven by technological change. This indicates that trade is not responsible for the rising wage inequality but factors such as non trade elements of technical change are more or less responsible for rising wage inequality across developing countries. Therefore the predictions of heckscher ohlin model are not entirely incorrect are still relevant.