Answer to Question #170757 in Economics for Lorrin

Question

Under what set of assumptions do countries with the same technology and factor endowments trade with one another. Name three reasons this type of trade could be welfare enhancing and explain.

Answer 1

The critical assumption of the Heckscher–Ohlin model is that the two countries are identical, except for the difference in resource endowments. This also implies that the aggregate preferences are the same.

By calculating changes in real income in the Heckscher-Ohlin (H-O) model, it can be shown that some individuals will likely benefit from free trade, while others will suffer losses. An increase in aggregate welfare means only that the sum of the gains exceeds the sum of the losses.