Unit 4 Individual Project - Essay Example

The Heckscher-Onlin theory was developed two economists Eli Heckscher and Bertil Ohlin in the 1920’s. The theory has implication for the international trade among nations worldwide. The theory provides an explanation of why different countries exchange goods and services among each other (Nobelprize, 2008). The theory stipulates that a particular country will specialize in the production of goods and services that the country has expertise, thus it can produce them more efficiently than other nations.

The specialization of goods and services among nation creates the incentive to trade the products you are good at producing in exporting transitions and the goods and services a country is not efficient at producing are imported into an economy. The end result of the trade activity among nation is a better standard of living of all the participating nations in international trade (Nobelprice, 2008). The Ricardian theory was derived from the principles of the Heckscher-Ohlin theory as far as its objectives.

The theory is better than Heckscher-Ohlin because it adds the element of labor theory of value into the demand and supply approach used in the Heckscher-Ohlin economic model (Gontijo, 2000). Another major difference is the inclusion of the concept of competitive advantage into the Ricardian theory. Trade activity among trade partners positively affects the distribution of income of the countries involved in the transactions. The Heckscher-Ohlin model demonstrates the positive outcome of trade which increases the distribution of income the resident of nations.

The way distribution of income is improved through trade is due to the appreciation of value as direct consequence of trade transactions. For example Argentina is able to produce apples at $1 a pound, and sells them in the open market at $1.75 per pound. In Brazil it cost $2 to produce the same apples, then Brazil has no incentive to produce apples since it can purchase them at $1.75 from Argentina. In the transaction Brazil acquired value in the form of $0.25 which is distributed in the economy of the nation and which positively affects the standard of living of all Brazilians.

Factor endowment theory equalizes the relative costs between nations as well as the prices of factors of production (Csus). The principle assumption of the theory is that price equalization is derived from international activity trade among nations. The applicability of endowment theory is greatly enhanced by Leontief theory. The Leontief theory says that a country specialized in one end of the production in which is efficient such as capital extensive production enters into trade with countries which are at the opposite spectrum of labor intensive production.

The end result is the acquisition of wealth among the trading partners. Instead of price equalization the Leontief theory shows the acquisition of wealth a nation obtains as a result of international trade activity. The renounce economist Staffan Linder had specific views on how international trade patters could be classified into two alternative routes: the manufacturers or the agricultural approach. The primary approach is the manufacturer approach which is associated with capital intensive production.

The secondary approach is the agricultural approach, a strategy direct at exporting goods or services from labor intensive industries. The labor intensive approach was successfully implemented for nearly three years by the fastest emerging economy in the world, China. Question from audienceDescribe a specific tariff, an ad valoem tariff, and a compound tariff. What are the advantages and disadvantages of each?TariffDescriptionPro ConAd ValoremA tariff that is quantified based on a percentage value of the good or serviceProvides a linear variable which provides consistency to the system since the tariff is a equivalent fraction of the value of the itemMust be constantly adjusted due to inflationary forcesSpecificTariff imposed based on a characteristic such as value, weight or surface of the itemProvide the possibility of higher income since the tariff is variable.

Subject to international variability in price changes. If prices falls inflows from the tariff fall. Cannot be applied to services since a service is intangible and the characteristics to calculate the tariff are tangible.CompoundCombines the specific tariff and the ad valorem tariff. It is a better system to implement adjustment mechanismMay be harder to c implement at customs which causes operating efficiencies.ReferencesCsus.edu. Chapter 3 – Overview. Available January 28, 2008 from http://64.233.169.

104/search?q=cache:nsUew0f1wdwJ:www.csus.edu/indiv/w/woosterr/econ190/CH3_Overview.pdf+Leontief+paradox+-+Factor+endowment+model&hl=en&ct=clnk&cd=4 Gontijo, C. (2000). The Ricardian Theory of International Trade: A Criticism. Retrieved January 28, 2008 from http://www.cedeplar.ufmg.br/pesquisas/td/TD 141.doc Nobelprize.org (2008). Why Trade. Retrieved January 28, 2008 from http://nobelprize.org/educational_games/economics/trade/ohlin.html