Comparative advantage is affected by the interaction between a country’s resources, namely the endowments of the factors of production and the production technology which determines how intensively these factors are used in the production process. What we understand from the Heckscher-Ohlin model is that trade is by and large directed by the differences in resources or to state it differently, the existence of differences in economies’ resources is the cornerstone of international trade.
It is important to highlight that Heckscher-Ohlin theory does not contradict the Ricardian one which is built on the assumption that international trade is based on differences in comparative costs. Actually, Heckscher-Ohlin theory tries to explain what causes …show more content…
Thus he concludes, a part of trade is actually “missing” and identical technologies among countries may account for this “gap”. Under this scope, Heckscher-Ohlin theory may explain the direction of trade well. US imports from Bangladesh include more low-skill-intensity commodities, while US imports from Germany include more high- skill-intensity goods. However, it explains poorly the volume of trade. In fact, the actual trade volume is much lower than the predicted volume of …show more content…
They use the case of Japan as although the country was isolated for over 200 years, managed to move from complete autarky to free trade within seven years. The authors found that trade and thus exports were indeed driven by the mechanism of comparative advantage as the opening-up may have had a significant substantial impact on relative returns to factors. They provided evidence that the comparative advantage gains from trade in real income do not exceed 9 percent of Japan's GDP. A key feature of this transition is that trade liberalization in Japan led relative prices to be changed dramatically. Consequently, their results are in favor of the Heckscher-Ohlin theorem described above. In their most recent paper, Bernhofen and Brown (2016) tested the overall validity of the Heckscher-Ohlin theorem. In particular, they proved that each country’s factor price vector in autarky determines what the country will trade in terms of factors with the rest of the word. In other words, this result confirms the prediction of Heckscher-Ohlin theorem that countries will export the factors they have in abundance whereas they import the factors in scarcity.
The basic idea of the Heckscher-Ohlin theory i.e. that factors’ endowments are substantial for trade
It is important to highlight that Heckscher-Ohlin theory does not contradict the Ricardian one which is built on the assumption that international trade is based on differences in comparative costs. Actually, Heckscher-Ohlin theory tries to explain what causes …show more content…
Thus he concludes, a part of trade is actually “missing” and identical technologies among countries may account for this “gap”. Under this scope, Heckscher-Ohlin theory may explain the direction of trade well. US imports from Bangladesh include more low-skill-intensity commodities, while US imports from Germany include more high- skill-intensity goods. However, it explains poorly the volume of trade. In fact, the actual trade volume is much lower than the predicted volume of …show more content…
They use the case of Japan as although the country was isolated for over 200 years, managed to move from complete autarky to free trade within seven years. The authors found that trade and thus exports were indeed driven by the mechanism of comparative advantage as the opening-up may have had a significant substantial impact on relative returns to factors. They provided evidence that the comparative advantage gains from trade in real income do not exceed 9 percent of Japan's GDP. A key feature of this transition is that trade liberalization in Japan led relative prices to be changed dramatically. Consequently, their results are in favor of the Heckscher-Ohlin theorem described above. In their most recent paper, Bernhofen and Brown (2016) tested the overall validity of the Heckscher-Ohlin theorem. In particular, they proved that each country’s factor price vector in autarky determines what the country will trade in terms of factors with the rest of the word. In other words, this result confirms the prediction of Heckscher-Ohlin theorem that countries will export the factors they have in abundance whereas they import the factors in scarcity.
The basic idea of the Heckscher-Ohlin theory i.e. that factors’ endowments are substantial for trade