Provide a detailed explanation for how the Heckscher-Ohlin theory differs from the Ricardian model

Authors Avatar by hongduyen (student)

Provide a detailed explanation for how the Heckscher-Ohlin theory differs from the Ricardian model of Unit II.

The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by two economists Eli Heckscher and Bertil Ohlin. 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 utilize their abundant and cheap factors of production and import products that utilize the countries' scarce factors.

However, it is more notable in the Heckscher-Olin model may be the assumption that capital cannot move from nation to nation. That assumption is a key to several consequences. Yet, in today global economy, capital is extremely changeable across national borders. Because of this information, whether it may be better to work with a model that includes labor as the only immobile element of production. To explain a little more technically, assume that an industry has production function: Y = F (K,L). And assume that the marginal product of capital is influenced by the world rental cost of capital R: FK(K,L) = R. Then with these two equations, we can eliminate K and solve for output as a function of L (and R, which a nation takes as given). If F is homogeneous of degree one in K and L. That is, constant returns to scale, then the resulting reduced-form production function will be linear in labor, precisely as accepted in the Ricardian model. Since a doubtful conclusion, therefore, it is logical to think that in a world with considerable capital mobility, the Ricardian theory of trade is more valuable than Heckscher-Olin.

Join now!

One might accept that tangible capital goes internationally to equalize the marginal product round the world but that human capital cannot move. Subsequently all, American can easily invest in Toyota stock but not in a college degree of a Japanese worker. In this case, one might conclude that the right distinction for Heckscher-Olin is not capital and labor but instead skilled and unskilled workers. Nevertheless, there is different way to consider about the problem. Suppose every family chooses how long to keep their kids in school. Each confronts a tradeoff between marginal investments in human capital and marginal investments ...

This is a preview of the whole essay