Answer to Question #175492 in Macroeconomics for Deen

Question

According to the Heckscher Ohlin model countries tends to export goods which intensively use their abundant factors of production, How is this preposition different from Ricardian model? Give an illustration

Answer 1

Solution:

The Heckscher-Ohlin model is different from the Ricardian model, which focuses on comparative advantage. According to the Ricardian model, there are two countries producing two goods using only one factor of production that is labor. The model is a general equilibrium model in which all markets are perfectly competitive. The products produced are assumed to be homogeneous across countries and firms within an industry. The model also assumes that trade occurs between countries because of the differences in labor productivity that happens as a result of technological differences.

This is illustrated as follows:

• There are only two countries.
• They produce 2 products.
• Production only requires one input, that is labor, which is limited in both countries and is perfectly immobile.
• Opportunity cost between the goods is constant in each country, that is the production possibility frontier is a straight line.
• There is neither transportation cost nor transportation cost.

A country has an absolute advantage over the other if it is more efficient at producing both goods than the other country. A country has a comparative advantage in producing a particular good if the opportunity cost of producing that good is lower than in the other country. The model assumes that absolute advantage does not necessarily imply comparative advantage. As long as the relative cost of production is different in the two countries, comparative advantage exists.