Answer to Question #207699 in Economics for Tomori

Question

Which one is better suited to explain trade between nations Ricardo's or HO thoery and why?

Answer 1

Under the influence of international trade, the relative prices of goods involved in world trade tend to equalize. This also leads to the equalization of the ratio of prices for the factors of production used in the creation of these goods in different countries. The nature of this interaction was revealed by the American economist P. Samuelson, who proceeded from the basic postulates of the Heckscher-Ohlin theory. In accordance with the Heckscher-Ohlin-Samuelson theorem, the mechanism for equalizing prices for factors of production is as follows. In the absence of foreign trade, the prices of factors of production (wages and interest rates) will differ in both countries: the price of the surplus factor will be relatively lower, and the price of the scarce factor will be relatively higher.

Participation in international trade and the country's specialization in the production of capital-intensive goods leads to the flow of capital into export industries. The demand for a factor of production that is surplus in a given country exceeds the supply of the latter, and its price (interest rate) rises. On the contrary, the demand for labor, which is a scarce factor in a given country, is relatively reduced, which leads to a decrease in its price - wages.

In another country, which is relatively better endowed with labor resources, specialization in the production of labor-intensive goods leads to a significant movement of labor resources to the corresponding export sectors. An increase in the demand for labor leads to an increase in wages. The demand for capital decreases relatively, which leads to a decrease in its price - the interest rate.