Answer to Question #207698 in Economics for Tomor

Question

Draw parallels between Ricardo's and HO theory?

Answer 1

D. Ricardo's theory of comparative advantage

David Ricardo, in his book "Beginnings of Political Economy and Taxation" (1817), convincingly proved that interstate specialization is beneficial not only in cases where a country has an absolute advantage in the production and sale of this product over other countries, i.e. it is not necessary that the costs of producing this product be less than the costs of similar products created abroad. It is quite enough, according to D. Ricardo, for this country to export those goods for which it has a comparative advantage, i.e. so that for these goods the ratio of its costs to the costs of other countries would be more favorable for it than for other goods.

The theory of comparative advantage is based on a number of assumptions. It comes from the presence of two countries and two goods; production costs only in the form of wages, which, moreover, are the same for all professions; ignoring differences in wage levels between countries; lack of transport costs and free trade. These initial prerequisites were necessary to identify the basic principles of the development of international trade.

Heckscher-Ohlin's Factor Correlation Theory

Further development of the classical theory of international trade is associated with the creation in the 20s. XX century Swedish economists Eli Heckscher and Bertil Olin of the theory of the ratio of factors of production, which was most fully described in the latter's book "Interregional and International Trade" (1933). This theory is based on the same premises as the theories of absolute and comparative advantages of Smith and Ricardo. The main difference is that it proceeds from the presence of not one, but two factors of production: labor and capital. According to the views of Heckscher and Ohlin, each country is endowed with these factors of production to varying degrees, which gives rise to differences in the ratio of prices for them in countries participating in international trade. The price of capital is the interest rate, and the price of labor is wages.

The level of relative prices, i.e. the ratio of the prices of capital to labor in countries more saturated with capital will be lower than in countries with a capital deficit and relatively large labor resources. Conversely, the level of relative prices for labor and capital in countries with surplus labor resources will be lower than in other countries where they are scarce.

This, in turn, leads to a difference in the relative prices of the same goods, on which national comparative advantages depend. Hence, each country tends to specialize in the production of goods requiring more factors, with which it is relatively better endowed.