Compare And Contrast The Classical And Heckscher-Ohlin Model

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Name: Imabong Effiong-Akpan Cohort Group: A (8:30 class) Number of Words: Title: Compare and contrast the classical (Ricardian model) and Heckscher-Ohlin (HO) theories of the commodity composition of trade. Discuss the differences in assumptions, post trade production points, and the effects of trade on the distribution of income The Ricardian Model shows that a developed country can compete against a less developed country which is due to comparative advantage, even though the less developed country pays its workers lower wages. The Heckscher-Ohlin model seeks to explain how countries should operate when resources are not distributed equally around the world. Assumptions According to the Ricardian model, the labor theory…show more content…
Initially, Home is at a no-trade equilibrium at point A with a relative price of cloth at (PC/PF) Autarky. An increase in the relative price of computers to the world price, as illustrated by the steeper world price line, (PC/PF) Trade, shifts in production from point A to point B. At point B, there is a higher output of cloth and a lower output of food. This would cause an increase in the relative price of cloth which shifts the economy-wide relative demand for labor toward the relative demand for labor in the cloth industry. The new relative demand curve would intersect the relative supply curve for labor at a lower relative wage. As a result, the wage relative to the rental falls. The lower wage causes both industries to increase their labor-capital ratios. According to the Stolper-Samuelson theorem, in the long run, when Home opens to trade and faces a higher relative price of cloth, the real rental on capital in Home rises and the real wage in Home falls. In Foreign, the changes in real factor prices are just the reverse. Putting together the Heckscher-Ohlin theorem and the Stolper-Samuelson theorem, we can conclude that a country’s abundant factor gains from the opening of trade (because the relative price of exports goes up), and its scarce factor loses from the openings of trade. In the Ricardian model, we would consider two goods which are cloth and wine. aLW/aLC < (a* LW)/(a*LC) The…show more content…
Clearly, Country B should export wine, earning 2.5 yd. of cloth for each barrel. This is a profit or gain of 1/2 yd of cloth for each barrel produced and traded. Producers in Country B profit by producing more and more wine at the expense of cloth production. Eventually, Country B would become completely specialized producing only wine, 4000 barrels worth. In the Graph, production moves from 3000 Cloth and 2500 Wine to the bottom corner of Country B’s PPF at 4000 Wine. The opposite occurs in Country A. It would be cheaper for it to buy wine at 2.5 yd/bbl than to produce it domestically at a cost of 3 yd/bbl. Consequently, producers in Country A would reduce production of wine in favor of cloth production. Again complete specialization occurs with Country A producing only cloth and no wine. Total output in Country A would be 9000 yd of cloth as shown in the graph at the top corner or vertical intercept of its

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