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"The relevance of H-O model to international trade"
The relevance of H-O model to international trade
Author:
Margaret Rowden
Introduction


Early at time of David Richardo, he has justified in terms of a one-factor model in which the product of his single factor, labour, happened to be different between countries. But it is natural to ask why the productivity of labour should vary. Typically, Richardo's one-factor model, which he attributes such differences to climatic conditions or different levels of technology. H-O model focuses on the differences in factor abundance, and how production of different goods uses factor in different proportion. In Richardo's model, there is only labour, so on redistribution is possible. In H-O model trade can cause redistribution effects across different factors. There are some differences between two models, however, the determination of the pattern of trade, and determination of relative price are main two similarities.


However, an alternative explanation was suggested in the 1920s by the Swedish economists Eli Heckscher (1879-1952) and Bertil Ohlin (1899-1979), and has since become the orthodox explanation of the source of comparative advantage. Those most influential theorems in the theory of international trade are mainly derived from the traditional 2x2x2 Heckscher-Ohlin (HO) model. These theorems include (HO) theorem, Stolper-Samuelson (1941) (SS) theorem, factor price equalisation (FPE) theorem, and Rybczynski (RY) theorem. Trade theorists often claim that these theorems are general equilibrium comparative, static results of the traditional the Heckscher-Ohlin (HO) model. And partly due to the "belief that the traditional HO model is able to derive unambiguous comparative static results with very general functional forms"(Wen Li Cheng & Xiao Kai yang), the HO model has dominated the field of international trade for the past few decades.

Factor abundance

Heckscher-ohlin result is a neo-classical trade model that production structure, the demand structure, and the equilibrium structure, and the equibrium relationships between them. Heckscher-ohlin proposition is "in a neoclassical framework with two final goods, two factors of production,...

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