Answer to Question #48170 in Economics for sara

Question

1) Present a one-factor Ricardian model of two countries, A and B, trading two goods, X and Y, and discuss the gains of trade generated in this model.

2) Verbally and graphically explain the production structures of trading partners in the HO model. Your answer should discuss output and input choices given goods and factor prices as well as factor endowments.

3) Verbally and graphically present the benefits of trade from the perspective of the HO model. List and briefly explain two main implications of trade.

Answer 1

1) The modern version of the Ricardian model assumes that there are two countries producing two goods using one factor of production, usually labor. The model is a general equilibrium model in which all markets (i.e., goods and factors) are perfectly competitive. The goods produced are assumed to be homogeneous across countries and firms within an industry. Goods can be costlessly shipped between countries (i.e., there are no transportation costs). Labor is homogeneous within a country but may have different productivities across countries. This implies that the production technology is assumed to differ across countries. Labor is costlessly mobile across industries within a country but is immobile across countries. Full employment of labor is also assumed. Consumers (the laborers) are assumed to maximize utility subject to an income constraint.
2) The Heckscher–Ohlin model (H–O model) is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that use their abundant and cheap factor(s) of production and import products that use the countries' scarce factor(s).
3) The exports of a capital-abundant country will be from capital-intensive industries, and labour-abundant countries will import such goods, exporting labour-intensive goods in return. Competitive pressures within the H–O model produce this prediction fairly straightforwardly. Conveniently, this is an easily testable hypothesis.