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
(David Ricardo, Theory of Free International Trade). The neoclassical economists believed that in a competitive market, prices would direct consumers and cause the most efficient allocation of resources, which will maximize society’s income. This believe had developed the pure theory of trade and this also present Adam Smith’s theory in the invisible hand of the market and competition. Also, it shows the benefits of laissez-faire policy in relation to international exchange. 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.
He offered an idea that how a country might play a game strategically and could be successful in extracting great levels of revenues from trade, by implementing new trade theories. The comparative advantage theory of Ricardian gained a new aspect as Porter emphasized on development of comparative advantage or innovativeness by improving to sustain greater shares of market. Therefore, the idea of productivity that can be work to attain greater levels of international competitiveness (IC) emerged [Porter (1990)]. Indices based on productivity are extensively used in the measurement of competitiveness. As per Porter point of view productivity is the most valuable thought in international competitiveness.
Neo – Classical Trade Theories The Factor Endowment Theory, developed by Eli Heckscher and Bertil Ohlin, establishes that a nation will export the product that uses a large amount of its relatively abundant resource, and it will import the product which in production uses the relatively scarce resource. Therefore, the factor endowment theory predicts that India, with its relative abundance of labour will export shoes and shirts while the United States with its relative abundance of capital, will export machines and chemicals. The factor endowment theory consists of two important theorems, mainly, (1) Heckscher Ohlin theorem which states that a country has comparative advantage in the production of that commodity which uses intensively the
Classical international trade theory is a departure from mercantilism, which mainly introduces the idea that free trade could be mutually beneficial for trading countries. The notion that depends on absolute advantage was initially developed by Adam Smith, in his book titled “Wealth of Nations (1776)”. According to Smith, countries should produce goods only if they can produce them at a lower cost compared to any other country in the world. This idea briefly states that when a country is capable of producing a product at a lower cost than any other country, that country has an absolute advantage in the production of that good. This simple concept was revised by David Ricardo and then he developed a new notion namely the comparative advantage.
[44,pp 242-3] The standard case for free trade is based on a number of assumptions and simplifications. Much of the literature ignores the macroeconomic context. For eg. Kaldor argues that the ricardian rationale for free trade is dependent on the assumptions of constant returns to scale. However, the existence of economies of scale in manufacturing means that a nation that is successfully competing in foreign trade can expect that the advantage of an expanding market will increase it competitiveness.
This model states that a country should specialize in producing and exporting products that they can produce more efficiently at a lower opportunity cost. As for the assumptions, the models assume perfect competition in all markets, there are two trading countries, there are two good being produced, and both models represent a general equilibrium model. There are some differences; for example, HO has two factors of production (labor and capital), while Ricardian has one factor (labor). HO assumes that the only difference between the two countries is the endowments of labor and capital, while Ricardian assumes the only difference is the productivity from technological differences. 2.
The first theory of international trade was mercantilism (T.Men, A.Serra, A.Monkreten). The mercantilists believed that the wealth that nations had were fixed and, consequently, welfare of a country was possible only through the redeployment of existing wealth, at the cost of other countries. The mercantilists believed that for ensuring a constant inflow of gold into the country export should increase and import should be limited. Over time, the best practices of mercantilism began to enter into conflict with the needs of developing capitalism, which required the abolition of feudal restrictions and the transition to free trade. Further development of the theory of international trade received in the writings of the classical
There by a country would be able to maximize its production (GNP) and its consumption or One big question that smith failed to answer was what if a country does not have absolute advantage? What would be the structure of the trade? David Ricardo addressed the answer for this question through comparative advantage (Ibid). He pointed out that countries should specialize in production where their greatest comparative advantage. Economic welfare (Salvatore,
Comparative Advantage (David Ricardo) Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. We can say that when a person or state has lower opportunity cost in the production of goods, that is means they have comparative advantage in the producing of good. Everyone or every state can produce the good at lower opportunity cost than others. That’s why they should specialize in the good that have the lower opportunity cost. The example States Rice (kg) Rubber