Question

Explain why the Eli Hecksher and Bertil Olin felt that it was needed to improve the David Ricardo's theory of comparative advantage. What were the flaws Eli Hecksher and Bertil Olin determined that existed in the Ricardo's views regarding the income distribution and the comparative advantage?

Answer 1

The Ricardian model tells us that the production possibilities are determined by the allocation of a single resource between sectors and delivers the idea of comparative advantage, however, it does not talk about the income distribution aspect.

The Heckscher-Ohlin method on the other hand takes in to consideration the multiple factors of production that can move across sectors. Differences in the availability of those factors of production determine the trade patterns and thereby discussing the long run aspects of income distribution between nations.

Unlike the Ricardian model, the Heckscher-Ohlin model depicts the interactions across markets by observing the changes in the demand and supply in one market with trade and its influence on the factor market, goods market and the national market at home and in abroad since markets everywhere are connected through trade in this model. Therefore, the model predicts the effects of improved efficiency and that trade in such a market is likely to create income redistribution.

A drawback of the Ricardian model is also that labor is the only responsible factor for comparative advantage, however, the HO Model sees that factor abundance is the responsible factor driving comparative advantage. The Ricardian theory does not take into account the space element since it is based on a single market theory whereas the HO Model takes the space element into account by considering the muti-market case thereby inculcating the scope to discuss the distribution of income.