...Course Name: Foreign Trade and Economic Development Course Code: 153400106 Tutor’s Name: Sahar Rad _____________________________________________________________ Title of Essay: Discuss how trade leads to the convergence of factor prices in the Heckscher-Ohlin Model. Does empirical evidence validate the propositions of this theory? Word Count: 2,909 words Essay 1 : Discuss how trade leads to the convergence of factor prices in the Heckscher-Ohlin Model. Does empirical evidence validate the propositions of this theory? Abstract The Heckscher-Ohlin model (H-O model) states that a country possesses comparative advantage for those goods whose factors of production are in relatively abundant supply in the country’s endowment. Input combinations depend on the relative factor prices and these in effect, influence the goods prices. Factor prices and the goods prices have a one-to-one relationship. Countries tend to export goods, whose production makes intensive use of the resources. There are four components to the H-O model, and these are: The Heckscher-Ohlin Theorem, The Stopler-Samuelson Theorem, The Rybczynski Theorem and The Factor-Price Equalisation Theorem. The Heckscher-Ohlin model (H-O model) was developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics [Krugman and Obstfeld, 2003]. This model states that a country possesses comparative advantage for those goods whose factors of production are in relatively abundant supply in the country’s endowment. Countries...
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...International Economics ECON22185 Assessment title: Analyse how, according to the Heckscher-Ohlin model of international trade, factor endowments explain a country’s comparative advantage and determine which types of goods a country will produce, export and import. According to J.Sloman (2010) comparative advantage is defined as ‘a country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost: i.e. if it has to forgo less of other goods in order to produce it.’ David Ricardo had developed the basic theory of comparative advantage which was further developed by two Swedish economists, Bertil Ohlin and Eli Heckscher who developed the Heckscher-Ohlin model in 1933 which explains why countries trade goods and services with each other and how factor endowments determine which goods a country would produce, export and import. Factor endowments are the amount of labour, capital, land and entrepreneurship that can be exploited for manufacturing in a country. Labour and capital are the two factor endowments that the Heckscher-Ohlin model refers to. The Heckscher-Ohlin model assumes that the only difference between countries that are trading was the relative abundances of labour and capital they had. The model contained two countries, two goods that it could produce and two factor endowments; labour and capital, which is why it is sometimes referred to as the ‘2x2x2’...
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... X OB Y Y* OA (PX/PY)IE (PX/PY)I2 E * Note: OA : offer curve of country A OB : offer curve of country B (PX/PY)IE: International price at E E : The equilibrium terms of trade 3. False. The autarky equilibrium occurs when available production meets the societal satisfaction at the highest level. In autarky equilibrium, a nation’s marginal rate of transformation (measured by the slope of its production possibilities schedule) equals the marginal rate of substitution (measured by the slope of its community indifference curve); in other words, relative price is equal to opportunity cost. 4. The Heckscher-Ohlin theory explains comparative advantage as the result of differences in countries’ relative abundance of various resources. 5. False. According to the factor-endowment theory, international specialization and trade cause a nation’s cheap resource to become more expensive and a nation’s expensive resource to become cheaper. Home country is capital abundance; foreign country is labor abundance. + Before trade: (K/L)H > (K/L)F (w/r)H > (w/r)F (PX/PY)H > (PX/PY)F + International specialization:...
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...The Heckscher-Ohlin theory explains why countries trade goods and services with each other. One condition for trade between two countries is that the countries differ with respect to the availability of the factors of production. They differ if one country, for example, has many machines (capital) but few workers, while another country has a lot of workers but few machines. According to the Heckscher-Ohlin theory, a country specializes in the production of goods that it is particularly suited to produce. Countries in which capital is abundant and workers are few, therefore, specialize in production of goods that, in particular, require capital. Specialization in production and trade between countries generates, according to this theory, a higher standard-of-living for the countries involved. New notes The Heckscher Ohlin model Introduction The Heckscher Ohlin model Predicts that different factor endowments between countries is a key issue in the international trade flows but others such a WW Leontief, who in 1954 tried o test the theory empirically, found that this model failed to explain United States trading patterns. Read more: http://www.ukessays.co.uk/essays/economics/heckscher-ohlin-model.php#ixzz2DPfWNkhU The Heckscher Ohlin assumption The Heckscher Ohlin theory explains why countries trade good and services to each other. To apply this theory countries have to respect conditions; one of those is that the countries obviously differ with respect to the availability...
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...The Ecuadorian Rose Industry snowcapped volcanoes that rise to more than 20,000 feet. The bushes are protected by 20-foot-high canopies of plastic sheeting. The combination of intense sunlight, fertile volcanic soil, an equatorial location, and high altitude makes for ideal growing conditions, allowing roses to flower almost year-round. Ecuador apparently has a comparative advantage in the production of roses. Ecuador's rose industry started some 20 years ago and has been expanding rapidly since. Ecuador is noW the world's fourth largest producer of roses. Roses are the nation's fifth largest export, with customers allover the world. Rose farms generate $240 million in sales and support tens of thousands of jobs. In Cayambe, the population has increased in 10 years from 10,000 to 70,000, primarily as a result of the rose industry. The revenues and taxes from rose growers have helped to sophisticated pave roads, build schools, and construct irrigation systems. Maria works Monday to Saturday, and earns $210 a month, which she says is an average wage in Ecuador and substantially above the country's $120 a month It is 6:20 AM, February 7, in the Ecuadorian town of Cayambe, and Maria Pacheco has just been dropped off for work by the company bus. She pulls on thick rubber gloves, wraps an apron over her white, traditional embroidered dress, and grabs her clippers, ready for another long day. Any other time of year, Maria would work until 2 PM, but it's a week before Valentine's...
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...protection. What is less obvious is that sheltering domestic industries puts exports at a great disadvantage because it raises the cost of the foreign inputs used in their production. Moreover, an increase in the relative costs of domestic inputs may also occur through inflation or because of appreciation of the exchange rate as import restrictions are introduced. In practice, the distinction between inward-looking and outward looking approaches gets blurred. Most of the less developed countries have employed both strategies with different degrees of emphasis at one time or another 2. What is ‘Factor Endowments Theory’? Ans. The factor endowment theory was developed by Swedish economist Eli Heckscher and his student Bertil Ohlin. This theory consists of two important theorems, namely, the Heckscher-Ohlin theorem and the factor price equalization theorem. TheHeckscher-Ohlin theorem examines the reasons for comparative cost differences in production and states that a country has comparative advantage in the production of that commodity which uses more intensively the country’s more abundant factor. The factor price equalization theorem examines the effect or international trade on factor prices and states that free international trade equalizes factor prices between countries, relatively and absolutely, and thus serves as a substitute for international factor...
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...The Ecuadorian Rose Industry snowcapped volcanoes that rise to more than 20,000 feet. The bushes are protected by 20-foot-high canopies of plastic sheeting. The combination of intense sunlight, fertile volcanic soil, an equatorial location, and high altitude makes for ideal growing conditions, allowing roses to flower almost year-round. Ecuador apparently has a comparative advantage in the production of roses. Ecuador's rose industry started some 20 years ago and has been expanding rapidly since. Ecuador is noW the world's fourth largest producer of roses. Roses are the nation's fifth largest export, with customers allover the world. Rose farms generate $240 million in sales and support tens of thousands of jobs. In Cayambe, the population has increased in 10 years from 10,000 to 70,000, primarily as a result of the rose industry. The revenues and taxes from rose growers have helped to sophisticated pave roads, build schools, and construct irrigation systems. Maria works Monday to Saturday, and earns $210 a month, which she says is an average wage in Ecuador and substantially above the country's $120 a month It is 6:20 AM, February 7, in the Ecuadorian town of Cayambe, and Maria Pacheco has just been dropped off for work by the company bus. She pulls on thick rubber gloves, wraps an apron over her white, traditional embroidered dress, and grabs her clippers, ready for another long day. Any other time of year, Maria would work until 2 PM, but it's a week before Valentine's...
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...The theory of international trade: 1. Mercantilism Theory. 2. Absolute Advantage Theory. 3. Comparative Advantage Theory. 4. Heckscher-Ohlin's Theory 5. Porter’s Diamond of Competitive Advantage Theory. Mercantilism The first theory of international trade ,mercantilism, engaged in England in the Mid 16th century holding that a countries wealth is measured by its holdings of treasure which usually means its gold & silver. The principal assertion of mercantilism was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time gold & silver were the currency of trade between countries,a country could earn gold & silver by exploiting goods. Conversely, importing goods from other countries would result in a outflow of gold & silver to those countries.The main tenet of mercantilism was that it was in a country’s best interest to maintain a trade surplus,to export more than it imported.By doing so,a country would accumulate gold and silver and, consequently ,increase its national wealth, prestige & power. Government policies: Consistent with this belief, the mercantilism doctrine advocated government intervention to acieve a surplus in the balance of trade.The mercatelists saw no virtue in a large volume of trade.Rather they recommended policies to maximize exports and minimize imports.To achieve this. import were limited by tarrif and quotas.while exports were subsidized. The concept of Balance of Trade: ...
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...protection. What is less obvious is that sheltering domestic industries puts exports at a great disadvantage because it raises the cost of the foreign inputs used in their production. Moreover, an increase in the relative costs of domestic inputs may also occur through inflation or because of appreciation of the exchange rate as import restrictions are introduced. In practice, the distinction between inward-looking and outward looking approaches gets blurred. Most of the less developed countries have employed both strategies with different degrees of emphasis at one time or another 2. What is ‘Factor Endowments Theory’? Ans. The factor endowment theory was developed by Swedish economist Eli Heckscher and his student Bertil Ohlin. This theory consists of two important theorems, namely, the Heckscher-Ohlin theorem and the factor price equalization theorem. TheHeckscher-Ohlin theorem examines the reasons for comparative cost differences in production and states that a country has comparative advantage in the production of that commodity which uses more intensively the country’s more abundant factor. The factor price equalization theorem examines the effect or international trade on factor prices and states that free international trade equalizes factor prices between countries, relatively and absolutely, and thus serves as a substitute for international factor...
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...Mercantalism Mercantilism is an economic theory, thought to be a form of economic nationalism,[1] that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable". Economic assets (or capital) are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive and healthy balance of trade with other nations (exports minus imports). The theory assumes that wealth and monetary assets are identical. Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy by encouraging exports and discouraging imports, notably through the use of subsidies and tariffs respectively. The theory dominated Western European economic policies from the 16th to the late-18th century.[1] Absolute Advantage In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.[1][2][3][4][5][6] Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything;[7] in that case, according to the theory of absolute advantage, no trade will occur with...
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...INTERNATIONALIZATION Internationalization is the process of increasing involvement of enterprises in international markets. 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).[1] The product life-cycle theory is an economic theory that was developed by Raymond Vernon in response to the failure of the Heckscher-Ohlin model to explain the observed pattern of international trade. The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.[1] A commonly used example of this is the invention, growth and production of the personal computer with respect to the United States. The model applies to labor-saving and capital-using products that (at least at first) cater to high-income groups. In the...
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...dynamics can limit or expand these opportunities. CHAPTER 4. MAIN THEORIES OF OFDI 4.1 OFDI Outward foreign direct investment is also known as an outbound direct investment (ODI). The term stands for an investment flow out of a resident economy into foreign economy. According to the OECD definition transactions and positions are considered to be ODI when the ultimate controlling parent is from a foreign economy. The flow is contrary to the flow of FDI in which the investment flows into a resident economy. The investment can be made in a form of Greenfield investment, merger and acquisition or expansion of an existing foreign business operation. MNEs engage in ODI in order to gain competence and have better business opportunities. The investments take commonly place when the domestic market is saturated and foreign market offers better prospects. ODI commonly occurs when the country’s economy is growing to the extent that risk capital can be injected to foreign investments. For instance, foreign MNEs invested heavily in the Chinese economy in the 1990s. Consequently, China’s economy had extensive growth and currently Chinese MNEs are engaging in ODI in rapidly increasing numbers. 4.2 Early Theories of OFDI The modern contributions to microeconomic OFDI theory date back to early 20th century. Among the first attempts to explain OFDI as a phenomenon was Heckschers’ (1919) and Ohlins’ (1933) the Heckscher-Ohlin model on the international capital movement. The theorem is based on...
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...SOUTHEAST UNIVERSITY HECKSCHER-OHLIN MODEL Submitted to: Prof.Dr.Mohammed Ali Rashid Dean School of Arts & Social Science Submitted by: Faria HossainLisa Batch-17 Id no: 2013020106023 Course code: ECO 3233 Course Title: International Economics HECKSCHER-OHLIN MODEL A country shouldn’t produce the entire product because there will be an “inefficient allocation of resources”. Trade is needed because of “efficient resource allocation”. The entire nation has the main goal to increase GDP or per capita income because to increase “standard of living”. It only can possible with the proper use of resources. Income or output increased by the proper use of resources. So the differences between nation’s resources are the main source of trade. By Richardian model we can know that comparative advantage only can happen because of international differences in labor productivity. But in real world we can see that international differences between resources are the main source of trade. This is explained by Swedish economist Eli Heckscher and Bertil ohlin.This model shows that by the interaction between nation resources (the relative abundance...
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...Intercontinental University Online Unit 5 IP 1. According to James E. Anderson, Heckscher Ohlin trade theory predicts that trade allows countries to put away factor services as if it were in a totally conformed world, smoothing out differences in national factor endowment. Heckscher Ohlin theory of comparative advantage was created as an alternative to the Ricardian model and had a rastional duty. The differences in labor productivity were the explanation given by Ricardo for comparative advantage. Trade is due to differences in relative prices that would obtain in the absence of trade, and an average of each country’s citizens gain from such trade. 2. The distribution of income is affected by trade and is controlled by trading partners as well as in clearing up international trade patterns in such a way that countries have similar continuous returns to scale production functions for each good, but different amounts of capital relative to their labor supply. In the lack of trade, goods which call for large amounts of labor comparative to capital would be relatively less expensive in the other labor rich countries and relatively be of different economic transition of comparative advantage that countries exports goods would have lower relative prices in the absence of trade as this theory is one that is likely to occur to many economist as they approach the problem, one in which contains labor, land and capital is exogenous...
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...1.5.2 Defining ‘cross-cultural management’ Unsurprisingly, there is no one clear or definitive answer to the question of what defines cross-cultural management. The answer depends on which perspectives on ‘management’ and the relation of this process to ‘culture(s)’ we choose to emphasise. Mead and Andrews define cross-cultural management as the ‘development and application of knowledge about cultures in the practice of international management, when the people involved have different cultural identities’ (Mead and Andrews, 2009: 16). This can be compared with the definition given by Laurie Jackson in his book International HRM: A Cross-Cultural Approach (2002). He emphasises the importance of ‘examining the contributions of different cultures in interaction’. This emphasis on the complexities of ‘interaction’ or ‘communication’ between ‘cultures’ (i.e. groups of people or stakeholders) is one shared by Mead and Andrews, and it is developed throughout this course, where we discuss several case studies from the field of human resource management (HRM) and international human resource management or IHRM (cf. Briscoe and Schuler, 2004; Harris, et al., 2003). The text Cross-cultural Marketing, edited by Rugimbana and Nwankwo (2003, from which you’ll be reading in Unit 5) highlights the importance of communicating one’s cultural identity in international and cross-cultural management. The book eschews the traditional practice of asking how far marketing ideas that...
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