Heckscher-Ohlin Theory Comparative advantage comes up from differences in national factor endowments, such as land, labour, or capital, as opposite to Neoclassical trade theory which stresses productivity of products being produced for consumption. This theory suggest that the country should focus on exporting products using its scarce resources and brings across a free trade principle where goods will be moving freely without any trade barriers implying that this would make flow of resources in and out more demand and more supply will increase the country’s economy(Eli Heckscher 1919 &Bertil Ohlin1933). 2.4. New Trade Theory Achievement of economies of in 1970’s scale, trade can increase the different sorts of goods available for consumption and those goods can be in a decreased affordable price. Further, the ability to capture economies of scale before anyone else is an important first-mover advantage.
However, it has been acknowledged that, in differentiated products markets, tough competition may rule the market even when only two firms compete. The reason is that in these markets the degree of competition depends on the differentiation of the product rather than on the number of competitors. Then, the extent to which the merging firms will increase prices will depend on the degree of substitution between the merging products and the remaining ones. More specifically, the potential enhancement of market power due to a horizontal merger is analyzed under the unilateral effects or coordinated effects of the merger. While coordinated effects refer to the scope of collusion, facilitated by the lower number of competitors, unilateral effects refer to the risk that the merged firm, acting independently of any remaining rivals, finds profitable to raise prices after the merger.
Heckscher-Ohlin Theory Comparative advantage ascends from differences in national factor endowments, such as land, labour, or capital, as opposite to Ricardo’s theory which stresses productivity. This theory suggest that the country should focus on exporting products using its scarce resources and brings across a free trade principle where goods will be moving freely without any trade barriers implying that this would make flow of resources in and out more demand and more supply will increase the country’s economy(Eli Heckscher 1919 &Bertil
There are proprietary technology, managerial know-how, favorable access to raw materials, and learning-curve cost advantages. They can take the cost advantages of the existing firms, but the increases cost will reduce the potential profit. Lastly, the government policy will enhance the cost of entry into the industry that means the government regulated monopoly to ensure the affordable product
The neoclassical economists strongly agree that the comparative advantage theory by David Ricardo is much more relevant to international trade then the absolute advantage by Adam Smiths. As a conclusion, Ricardo and Malthus both are pessimistic to the future. While Adam Smith believed of a period of zero economic growth, Ricardo modified the growth model by adding the concept of diminishing returns, which later on the neo-classical economists used for international
However, with increasing returns to scale (decreasing costs), ie.,when Economies of Scale exist in production, mutually beneficial trade can take place even when the two nations are identical in every respect. Even if all countries are identical in their production abilities and have identical production possibility curves; there could be a basis for trade as long as there are Differences in Tastes. The Technological Gap between countries and the shift in the comparative cost advantage in production over the Product Cycle also give raise to international trade. According to the Availability Approach to the theory of international trade, a nation would tend to import those commodities which are not readily available domestically and export those whose domestic supply can be easily expanded beyond the quantity needed to satisfy the domestic demand. Modern theory of international trade differs from the classical comparative cost theory in many ways and is also superior to the
One of the most cited articles in economic integration literature is that of Abdel Jaber (1971). According to this study, welfare impacts of economic integration arrangements among developing countries should incorporate employment, productivity, and income effects in addition to the production and consumption effects. Furthermore, a number of studies have argued that economic integration among developing countries should not be treated as a tariff issue but as an approach to economic development. For instance, Roberson (1970) argued that the theories of economic integration have merely focused on gains of better resource allocation, whereas economic development is concerned with the employment of idle resources and better deployment of under-utilized resources to stimulate faster long-run growth. Another worth mentioning study is that of Mikesell (1965).
In Modern Theory, the gains from trade are divided into the gains from production (specialization) and the ones from consumption (exchange). Both consumers and producers gain from international trade by consuming more and producing more than the pre-trade level. Whereas the classical theories were based on static advantages, theory nowadays assumes dynamic comparative advantage and bases on the determination of equilibria. The optimal allocation of trade versus production therefore can be found by comparing the opportunity cost of a good to the return it yields from im- or exporting. The total amount of gains from trade is then measured by adding up consumption and production gains.
Trade including export and import is very important for a country’s economy. There have been many famous scholars defending their theories about the importance of trade for a country. David Ricardo, a British political economist as well as one of the influential classical economists, introduced the concept of comparative advantage. He suggested that a country shall concentrate or allocate its resource in industries where it is most internationally competitive and trade with other countries to get the goods which are not locally produced. He also claimed that if one country is more competitive in every area than its trading partner, there is mutual national benefit.
a country has comparative advantage in a good if has a lower opportunity cost of producing the good than an-other country. Countries are expected to export goods for which their autarky (no trade) relative prices are lower than other countries. Countries gain from trade when they have different autarky relative prices of goods David Ricardo: Principles of Political Economy (1817) Extends free trade argument Efficiency of resource utilization leads to more productivity Should import even if country is more efficient in the product’s production than country from which it is buying. Look to see how much more efficient. If only comparatively efficient, than import.