Question

Explain why positive economies of scale in one (of two) sectors may establish a comparative advantage for the large (as compared to the small) country in the production of the commodity which exhibits positive scale economies.

Answer 1

H-O model, also known as Heckscher-Ohlin model was founded by Heckscher and Ohlin. It makes an assumption that the causes of global trade is because of the differences in factors of endowments among countries. It further assumes assuming there are only two factors of production namely- skilled and unskilled worker. Furthermore, each country's line of production depends on their strength in term of labour and resources Thus a nation with a skilled workers is likely to produce skilled labour intensive goods, while with a unskilled workforces, that nation probably produces unskilled labour intensive goods.

Thus under the H-O model, the country's actual size is not relevant while determining the   direction of trade (although it may impact the equilibrium trade). When on production of one good the positive scale economies are applied the country which can devote more resources (in absolute terms) will be able to sell it cheaper, and thus will gain a "revealed" comparative advantage in the good. Thus positive scale economies in one (of two) sectors can reflect a comparative advantage for the large (in comparison to the small) nation in the good production which exhibits positive scale economies