This essay will mainly talk about three parts. First of all, there will be some explanations about the trade gains in both comparative advantage side and Heckscher–Ohlin models, there are some differences between them. Secondly, how the Heckscher–Ohlin theory will motive factor price equalization will be mentioned. The final part will be some reasons to show why it is unpractical in the world market.
This paragraph will talk about the trade gain in comparative advantage. The law of comparative advantage is that a country needs to focus on producing the good which has comparative advantage, and export them. Then import other goods. As a result, two trade partners will gain from trade. Suppose that A has 50 labors, each one can produce 6 laptops, …show more content…
The Heckscher-Ohlin theory only concern about the two factors of production, which are labour and capital. Some countries are capital intensive, the wage rates in these kinds of countries generally are high; as a result, the costs of producing is already higher than labour intensive country. If they need to further produce some labour-intensive goods, the wage will be even higher. It means that the cost of producing labour intensive good increase. However, capital intensive good will needs fewer costs. On the other hand, there are some labour intensive country, they have plentiful and cheap labour but less capital, this lead to labour intensive goods cheaper, laptops become expensive, also applies on wage rate. Thus, countries with more capital generally produce capital intensive goods cheaper, so they will export them and imports labour intensive goods. However, labour intensive countries will face a completely opposite trend. The graph of H-O model is consisted by PPF curve and indifference curve. The indifference curve gives the relationship of two goods and the level of satisfaction. The graph below are the Autarky situation in two countries, one is labour intensive country A, the other is capital intensive B., the consumers are consume at the highest utility .from the graph we can see that in A if they want to increase 1 unit of mobile, they need to sacrifice more clothes, so A has comparative advantage in …show more content…
We generally accept that labour intensive countries are developing country, so they will have lower wage rate. Capital intensive countries are developed country with higher wage rate. Suppose that now the economy is fully employed in capital and labour. Due to the free trade and H-O model, for a labour intensive country, The suddenly expansion in the labour intensive sector due to the exported goods increase and contraction of the capital intensive sector due to this country do not need to produce that much of capital intensive goods, they can import them, leading to the aggregate demand for labour increase, so wage increases. Because the price of exports remains constant, a higher wage implies a fall in the return to capital. On the other hand, developed countries show an opposite trend, the wage rate in labour sector will decrease; the return to capital will increase. As a result, the return to capital and wage rate will finally become equal between developed and developing country. The graph below shows the change in developing
This paragraph will talk about the trade gain in comparative advantage. The law of comparative advantage is that a country needs to focus on producing the good which has comparative advantage, and export them. Then import other goods. As a result, two trade partners will gain from trade. Suppose that A has 50 labors, each one can produce 6 laptops, …show more content…
The Heckscher-Ohlin theory only concern about the two factors of production, which are labour and capital. Some countries are capital intensive, the wage rates in these kinds of countries generally are high; as a result, the costs of producing is already higher than labour intensive country. If they need to further produce some labour-intensive goods, the wage will be even higher. It means that the cost of producing labour intensive good increase. However, capital intensive good will needs fewer costs. On the other hand, there are some labour intensive country, they have plentiful and cheap labour but less capital, this lead to labour intensive goods cheaper, laptops become expensive, also applies on wage rate. Thus, countries with more capital generally produce capital intensive goods cheaper, so they will export them and imports labour intensive goods. However, labour intensive countries will face a completely opposite trend. The graph of H-O model is consisted by PPF curve and indifference curve. The indifference curve gives the relationship of two goods and the level of satisfaction. The graph below are the Autarky situation in two countries, one is labour intensive country A, the other is capital intensive B., the consumers are consume at the highest utility .from the graph we can see that in A if they want to increase 1 unit of mobile, they need to sacrifice more clothes, so A has comparative advantage in …show more content…
We generally accept that labour intensive countries are developing country, so they will have lower wage rate. Capital intensive countries are developed country with higher wage rate. Suppose that now the economy is fully employed in capital and labour. Due to the free trade and H-O model, for a labour intensive country, The suddenly expansion in the labour intensive sector due to the exported goods increase and contraction of the capital intensive sector due to this country do not need to produce that much of capital intensive goods, they can import them, leading to the aggregate demand for labour increase, so wage increases. Because the price of exports remains constant, a higher wage implies a fall in the return to capital. On the other hand, developed countries show an opposite trend, the wage rate in labour sector will decrease; the return to capital will increase. As a result, the return to capital and wage rate will finally become equal between developed and developing country. The graph below shows the change in developing