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Heckscher-Ohlin Model Case Study

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1. The Heckscher-Ohlin model is a mathematical model that evaluates international trade and focuses on predicting the patterns of economics and production based on the factor endowments of a trading country and the assumption that countries have the same technologies for production. The model states that countries should export their products that use their abundant and cheap factors and import products that use their scarce factors. Meanwhile, the Ricardian model of international trade describes the difference in comparative advantage based on technological difference. 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, …show more content…

According to the Hecksher-Ohlin Theory, a country will have a comparative advantage in the good that uses its relatively abundant factor intensively and that will be the good that the country exports. The Production Possibilities Frontier graphic model of that country can relate to the Hecksher-Ohlin Theory. The slope of the curve represents the relative price and determines which country will have the comparative advantage. The steeper the slope, the higher the relative price is; a more flat slope indicates a cheaper price. An increase in the relative price of a good will increase the real return of the intensively used factor on the graph and decrease the real return of the other factor, and …show more content…

Raymond Vernon proposed the Product Life Cycle Theory, which is used to predict the patterns of industries and international trade. He argued that when a product is introduced in a new country, there is a rapid growth in supply and sales because there is no demand for the product. As popularity grows, more people begin to purchase the product; the demand is met and equal with the sales level. Once the demand is satisfied, the sales will decline, which will require the country to replace the product. Regarding international trade, the product life cycle advances because of other economies that introduce low-cost, cheap versions that imitate the original

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