Question

Do you understand the winners and losers from trade in the "Ricardian", "Specific Factor", and "Heckscher –Ohlin trade models"?

Answer 1

In the Ricardian setup, comparative advantage forms the basis of free trade. A country produces the good which is relatively cheaper for it to produce. Thus the winners are the producers of the commodity the country has a comparative advantage in producing (exporters) while others lose (cheap imports from foreign countries can put domestic producers out of business).

In the Specific Factor model, differences in resources can cause countries to have different relative supply curves. This facilitates international trade. Factors specific to export sectors in each country gain from trade, while factors specific to import-competing sectors lose.

In the Heckscher-Ohlin model the capital-abundant (labor-abundant) country will export the capital-intensive (labor-intensive) good and import the labor-intensive (capital-intensive) good. Thus, the country's relatively abundant factor gains from trade, while a country’s relatively scarce factor loses from trade.