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Explain the Heckscher- Ohlin model of international trade and assess the extent to which this model provides useful insights into trade policy issues in developing countries.

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Introduction

Explain the Heckscher- Ohlin model of international trade and assess the extent to which this model provides useful insights into trade policy issues in developing countries. International trade can be defined as the exchange of goods and services between one country and another, which arises due to the difference in relative costs of production between countries, it is also deemed to increase economic welfare of each country by widening the range of goods and services available of production. (The penguin dictionary of economics) The factor proportion model was developed by two Swedish neoclassical economists Eli Heckscher and Bertil Ohlin in the 1920's, in the model they try to explain why some countries are better at producing certain goods, and why the relative production costs are seen to vary between countries. Many economists believe that the classical economists cannot answer this question. Paul Samuleson provided many elaborations of the model after the 1930's, which I will discuss later on in the essay. The heckscher- Ohlin model is seen to incorporate a number of realistic characteristics of production that are left out of the Ricardian model; which only shows one factor of production, which is labour, and this is needed to produce goods and service. The productivity of labour is seen to vary, across countries so this therefore implies a difference in technology between countries. So it could be argued that it was the difference in technology that motivated international trade in the model. ...read more.

Middle

It can be argued that the H-O theorem demonstrates the differences in resource endowments, which are defined by national abundances this is one reason to why international trade may occur. The Stopler- Samuleson theorem describes the relationship between changes in output or goods, price and changes in factor prices such as wages and rents within the context of the H-O model. It can be argued that the theorem was developed to illuminate the issue of how tariffs would affect the incomes of workers capital (i.e. the distribution of income) within a country. However the theorem is just as useful when applied to trade liberalization. This theorem states that if the price of the capital intensive good raises, then the price of the capital; the factor used in the industry will rise, while the wage paid to labour will fall. The theorem was later generalised by Jones who constructed a magnitude effect for prices in the context of H-O model. The magnitude effect allowed for the analysis of changes in price of both goods and it provided information about the magnitude effect it allowed one to analyse the effects of price changes on real wages and the rentals earned by workers and capital owners. However, this can be deemed to constructive since real wages and rents affect price changes and this better well being than simply wage rate or rental alone. I believe that the Heckscher Ohlin model does provide some useful insights into the trade policies in developing countries. ...read more.

Conclusion

Wood in his article argues that the two countries are very similar; he believes that the Uganda's usually low manufactured export share isn't the cause of Zimbabwe's high share. As a result of this these two countries have different prospects in the future. He argues that improvements of its infrastructure could reduce but never eliminate Uganda's transport cost disadvantages in exporting manufactures, especially to the world markets. It can be seen that Uganda is better placed in exporting the processed primary products, based on local raw material rather than manufactures. In Zimbabwe the share of the manufactures in exports will slow down due to the liberal trade policies and improved transport in other African countries, which are now seen to buy a share of manufactured exports. In conclusion it can be argued that the workings of the H-O theory, in both the rich, middle income countries will be better of in the long run, purely because they will be producing what they are good at hence the whole notion of comparative advantage. However, it could be argued that the missing link in the theory is that of technology, which has appeared to widen the income gap between the skilled and the unskilled labour in the north, which is assumed to be the same in the H-O theory. The H-O theory is seen to complement and improve the arguments which were put forward by the Ricardian model, in the terms of the analysis of the trade patterns which are based on the differences in international endowment, its biggest role is the inadequate treatment of the role played by technology in influencing trade patterns, but the new trade theories address this issue adequately. ...read more.

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