Relatively Abundant Factor Of Production example essay topic

Introduction Early at time of David Richardo, he has justified in terms of a one-factor model in which the product of his single factor, labour, happened to be different between countries. But it is natural to ask why the productivity of labour should vary. Typically, Richardo's one-factor model, which he attributes such differences to climatic conditions or different levels of technology. H-O model focuses on the differences in factor abundance, and how production of different goods uses factor in different proportion.

In Richardo's model, there is only labour, so on redistribution is possible. In H-O model trade can cause redistribution effects across different factors. There are some differences between two models, however, the determination of the pattern of trade, and determination of relative price are main two similarities. However, an alternative explanation was suggested in the 1920's by the Swedish economists Eli Heckscher (1879-1952) and Bertie Ohlin (1899-1979), and has since become the orthodox explanation of the source of comparative advantage. Those most influential theorems in the theory of international trade are mainly derived from the traditional 2 x 2 x 2 Heckscher-Ohlin (HO) model.

These theorems include (HO) theorem, Stol per-Samuelson (1941) (SS) theorem, factor price equalisation (FPE) theorem, and Rybczynski (RY) theorem. Trade theorists often claim that these theorems are general equilibrium comparative, static results of the traditional the Heckscher-Ohlin (HO) model. And partly due to the "belief that the traditional HO model is able to derive unambiguous comparative static results with very general functional forms" (Wen Li Cheng & Xiao Kai yang), the HO model has dominated the field of international trade for the past few decades. Factor abundance Heckscher-ohlin result is a neo-classical trade model that production structure, the demand structure, and the equilibrium structure, and the equibrium relationships between them.

Heckscher-ohlin proposition is "in a neoclassical framework with two final goods, two factors of production, and two countries which have identical homo thetic tastes, a country will export the good which intensively uses the relatively abundant factor of production". In H-O model, the basic idea is that countries differ in their relative stocks of the different factors of production, and that these differential factor supplies influence the costs of producing particular goods. For example, a country with an abundant supply of capital finds it relatively cheap to produce goods whose production requires much capital and little labour, and therefore has a comparative advantage in-and export-such capital-intensive goods. For example, China is relatively abundant with labour-intensive manufacturing, they are able to produce the labour-intensive product more cheaply than UK. Thus China will have a comparative advantage in production of the L-intensive goods, clothes. This means that the relative price of clothes would be higher in UK in the absence of trade.

It is therefore just necessary to introduce a line- representing the exogenous terms of trade into figure 1. The result is shown in figure 2, with CP being the terms of trade line along which trade occurs. The international price of clothes is higher than the autarchy price shown in figure 1. As a result, Chinese clothes producers adjust their output from E to P, the production point where the new price line is tangential to the ppc (production possibility curve).

Output increases, at the expense of the production of counterpart. Real income is now sufficient to permit consumers to reach any point on PC, so in accordance with their preferences as represented by the social indifference curves, they pick the point of tangent point C. Trade equilibrium (P, C) has the following characteristics in comparison with autarchy equilibrium: 1. The international price of X, i.e. clothes is higher than the autarchy price shown in figure 1.2. The production of X increase and that of M decrease. 3. Real income is higher at P than at E. 4.

Because M is capital-intensive product which generate both positive income and substitution effect, consumption of M will increase. While that of X may either increase or decrease, because the positive income effect and negative substitution effect affect price of X -- if the effect of former is strong enough, it will increase, vice versa. 5. Export is a part of the excess of the production over the consumption of X, while the excess of consumption over the production of M consists of imports. 6. Figure 1, 2.

Alternative Theories of Comparative Advantage: Human Skills theory. By Donald Kissing. Instead of focusing on differences on Labor (L), and Capital (K), the emphasis should be on endowments and intensities of skilled and unskilled workers. An easy explanation of the Leontief Paradox since US has a highly educated and trained workforce relative to most countries, US exports tend to be skilled labor intensive-as evident from Kravis's data on US exports and imports. Leontief's 200 sector I-O model for the US in 1947 -- Used for testing the HO Model.

Suppose US exports decreased proportionately by $1 million, and US imports increased proportionately by $1 million, what capital and labor requirements would be necessary to effect this change in production levels? HO Model prediction? In 1947, US was the richest country, with its capital stock not exposed to war damage; the most capital-abundant country in the world Leontief's experiment was expected to show that the amount of capital per worker idled by a hypothetical reduction in US exports would exceed the amount of capital per worker needed to produce the hypothetical expansion of US import-competing products. Leontief found exactly the opposite!

In 1947, Leontief showed that; Replacement of $1 million. Imports by domestic output increase would require $3.2 million. of additional capital and 170 worker years of labor, while Reduction of US exports by $1 million. Would provide $2.6 million. of capital and 182.3 worker years of labor US exports appear to be more labor intensive relative to Imports-Leontief Paradox.