Question

If a scale economy is the dominant technological factor defining or establishing comparative advantage, then the underlying facts explaining why a particular country dominates world markets in some product may be pure chance, or historical accident. Explain, and compare this with the answer you would give for the Heckscher-Ohlin model of comparative advantage.

Answer 1

The heckscher ohlin theory of comparative advantage makes the use of resource abundance. It indicates that the trade patterns among countries are related to the relative resource abundance. A country which is labour abundant is likely to export the product which uses labour intensively. If we look at this theory, it is in complete contrast to what the question is suggesting. Scale economies are present when a particular company is able to produce a large number of units of a product so that the average total cost goes on falling. If trade pattern is decided by scale economies then only those firms in the international market will be trading that have scale economies. These are basically monopolies because only monopolies are able to produce large number of units so as to achieve scale economies. This is exactly opposite to the theory of comparative advantage where a particular company or a particular Nation can have comparative advantage based on lowest opportunity cost and not on scale economies. The statement is correct because if there is such a firm in the international market it can only happen by chance. Otherwise the prediction by heckscher ohlin model based on comparative advantage never result in domination by companies with scale economies.