Factor Endowments and the HeckscherOhlin Theory
What is the basis of mutual beneficial trade?
The basis of mutual beneficial trade is the comparative advantage based on specialization.
On which grounds has the theory of international trade been evolving?
The theory of international trade has been evolving on the grounds of the determinants of the comparative advantage.
Which theory has been accepted as the primer of the international trade theory?
Classical Trade Theory has been accepted as the primer of the international trade theory.
What does Classical Trade Theory assume?
Classical Trade Theory which has been accepted as the primer of the international trade theory assumes that the country whose labor is more productive in producing the commodity that is subject to international trade has a comparative advantage in this commodity.
What does the basis of international trade solely depend on?
The basis of international trade solely depends on the differences of labor productivity.
On which theory are the Theory of Absolute Advantage of Adam Smith and the Theory of Comparative Advantage of David Ricardo based on?
Theory of Absolute Advantage of Adam Smith and the Theory of Comparative Advantage of David Ricardo are based on the labor theory of value.
According to the Neo-Classical Trade Theory, on which conditions is there always an incentive for beneficial trade?
The Neo-Classical Trade Theory postulates that as long as the relative commodity prices are different, there is always an incentive for beneficial trade. In other words, the differences in relative commodity prices induce international trade between countries.
What does the relative price difference between two trading countries, two commodities, and two factors of production world depend on?
The relative price difference between two trading countries, two commodities, and two factors of production world depends on the supply and demand differences.
In the international trade analysis, what does production possibilities frontier (PPF) represent?
In the international trade analysis, production possibilities frontier (PPF) represents the total supply of the trading country while total demand is exhibited by the indifference curve (I).
Every choice or option on the production possibilities frontier involves a tradeoff. What does tradeoff mean?
Tradeoff refers to an exchange, giving up a thing to get something else.
How can opportunity cost be described?
Opportunity cost of a choice is the highest- valued alternative that is given up. It is the quantity ratio of the production decrease in the commodity to the production increase in the other commodity as the production moves along the production possibilities frontier.
What is the line that gives the combinations of commodities between which a consumer is indifferent called?
An indifference curve is a line that gives the combinations of commodities between which a consumer is indifferent.
How is an indifference curve drawn in reference to the origin?
Indifference curve is drawn convex to the origin.
What is the rate at which Sunland will give up wheel to get an additional unit of corn and at the same time remain indifferent called?
The marginal rate of substitution (MRS) is the rate at which Sunland will give up wheel to get an additional unit of corn and at the same time remain indifferent. The magnitude of the slope of an indifference curve is referred as marginal rate of substitution.
What are the twelve simplifying assumptions on which The Heckscher-Ohlin Theory stand on?
The Heckscher-Ohlin Theory stands on twelve simplifying assumptions:
- Two countries, two commodities and two factors of production
- One of the commodities is labor-intensive and the other one is capital-intensive in both countries
- One of the countries is labor-abundant and the other one is capital-abundant
- Technology is the same in both countries
- There are constant returns to scale in the production of both commodities:
- There is incomplete specialization in the production in both countries
- Demand preferences are the same in both countries
- There is perfect competition in the commodities and the factor markets in both countries
- There is free movement of factors of production within each country but no free movement of factors of production between countries
- There is free trade between the trading countries
- There is full employment in all resources in both of the trading countries
- International trade between the trading countries is balanced
What does 'Labor-intensive commodity' mean?
Labor-intensive commodity means that corn requires relatively more labor to produce than wheel in both Sunland and Lakeland. In other words, the labor-capital ratio (L/K) is higher for corn than for wheel in both countries at the same relative factor prices.
Heckscher-Ohlin Theory was developed so as to respond to two questions that had not been answered by the Classical Trade Theory. What are those questions?
- What is the determinant of the comparative advantage of the countries?
- How does international trade affect the earnings of the factors of production within the trading countries?
According to Heckscher-Ohlin Theory, what is comparative advantage of the trading countries explained by?
Heckscher-Ohlin Theory states that comparative advantage of the trading countries are explained exclusively by differences in relative supply conditions.
What does Stolper-Samuelson Theorem depend on?
Stolper-Samuelson Theorem depends on the International Factor Price Equalization Theorem. In spite of the similarities between them, Stolper Samuelson Theorem explains the distribution of income effects of international trade within a trading country while International Factor Price Equalization Theorem deals with the international distribution of income effects of international trade.
What does Specific Factors Model postulate?
Specific Factors Model postulates that some of the factors of production can be immobile or can only be used in the production of a commodity.