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Comparison among trade theories
This document discusses and compares theories of comparative advantage and the Heckscher-Ohlin theory of international trade. The comparative advantage theory states that countries benefit from specializing in goods they can produce relatively more efficiently. The Heckscher-Ohlin theory extends this by attributing comparative advantage to differences in factor endowments like capital, labor, and land between countries. It predicts that countries will export goods intensive in their abundant factors and import goods intensive in their scarce factors. While comparative advantage focuses on opportunity costs, Heckscher-Ohlin explains specialization through differences in national resources.
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Comparison among trade theories
- 1. Comparative Advantage tradeTheory: This Theory is considered to be an extension for Absolute Advantage Trade theory, David Ricardo Stated that it makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries To understand the logic we need to understand by an example Example: Suppose there are two countries of equal size, Northland and Southland, assume two products be clothes and food. Output of each country as follows Here Southland has an absolute advantage over Northland in both food and clothing products Food Clothes Northland 50 50 Southland 200 100 Total 250 150 The opportunity cost of Northland producing one tonne of food is one tonne of clothes. The opportunity cost of Southland producing one tonne of food is 0.5 tonne of clothes. This implies Southland has a comparative advantage in food production, because of its lower opportunity cost of production with respect to Northland. Northland has a comparative advantage in clothes production. Food Clothes Northland 0 100 Southland 300 50 Total 300 150 If you can see there is an advantage in terms of production of food and the output of the two countries together has increased. This is called comparative advantage HECKSCHER-OHLIN Theory: As comparative advantage theory is an extension for absolute advantage trade theory, this theory is like a comparative advantage trade theory with conditions called Factor endowments. In this trade theory Eli Heckscher and Bertil Ohlin explain that comparative advantage arises from differences in national factor endowments. By factor endowments they mean resources like land, labour and capital. Because nations have varying factor endowments explains the differences in factor costs. Food Northland:100tonnes Southland:400tonnes Clothes Northland:100tonnes Southland:200tonnes
- 2. Heckscher-Ohlin theory predictsthat countries will export those goods that make intensive use of factors that are locally abundant while importing goods that make intensive use of factors that are locally scarce. Example: U.S. has long been a substantial exporter of agricultural goods, reflecting in part its unusual abundance of arable land. Whereas China has excelled in the export of goods produced in labour intensive manufacturing industries. Thus China has relative abundance of low cost labour. The U.S. which lacks abundant low cost-labour has been primary importer of these goods. Main concept to be seen here is a country may have larger absolute amounts of land and labour than another country, but be relatively abundant in one of them. ComparisonbetweenComparative advantage and Heckscher-Ohlin theory: Comparative Advantage Theory Heckscher-Ohlin theory This theory is an extension to Absolute advantage trade theory. Here it is based on Opportunity Cost This theory is based on comparative advantage concept but attributes it to factor Endowments Fails to explain why a country specializes in production of certain goods Explains on the basis of factors like land, capital and labour on how a country specializes It just assumes that countries do differ in productivity Justifies the assumptions on the differences of the productivity. Only one factor is considered i.e. labour More than one factor is considered Technology is assumed to be varying across the countries Technology is assumed to be same across all the countries Relatively it has lesser ability to explain trade patterns Better ability to explain observed trade patterns It has large number of variations compared to Heckscher-Ohlin theory When used for large number of countries it tends to confirm the existence of the Leontief paradox Heckscher-Ohlin theory explains and specifies where the comparative advantage comes from (endowments)
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