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International trade - Essay Example

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It also discusses about the validity of the model. This model assumes the existence of two countries producing two commodities using…
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International trade
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International trade

Download file to see previous pages... Finally, it comments on the validity of the model and its implications in today’s world.
Before discussing the content of the model, it is important to know the assumptionson which the model is based. As already discussed this model assumes that there are two countries producing two goods, having two homogeneous factors of production. It is also assumed that technologies prevailing in the two countries are identical. Production of the two commodities abides by the conditions of constant returns to scale. One of the two commodities uses one of the two factors of production more intensively in comparison to the other. The existence of perfect competition is assumed in both commodities and factor markets. Factor mobility prevails within the same country but not among different countries. Tastes are also considered to be similar between the two countries. Finally, it is assumed that there are no trade barriers and no costs incurred for transportation. The Heckscher-Ohlin theory states that a capital abundant country exports commodities which are capital intensive and the country which is labour abundant exports commodities exports labour intensive commodities. This model has been explained with the help of a diagram.
The country which is exporting is referred as the foreign country and the country importing is referred to as the home country. It is assumed that the home country and the foreign country is exporting commodity 1 and 2 respectively. Then, according to the assumption, the home country exports good 1, while the good 2 is exported by the foreign country. To prove this, a particular case of factor endowment difference is considered, L/K > L*/K*, and it is also assumed that labour endowments in both countries remain identical. Thus, L = L*. The capital endowment in the foreign country exceeds that in the home country, i.e. K > K*. In order to determine the ...Download file to see next pagesRead More
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