Recent Post

July 14, 2013

Custom Essay on International Trade Patterns

                                                International Trade Patterns

Both Heckscher-Ohlin and Ricardian theories aim to explain international trade patterns. Heckscher-Ohlin theory was developed by Eli Heckscher and Bertil Ohlin in 1933. This theory attempts to explain the existence and pattern of international trade on a comparative cost advantage between the countries producing different goods. On the other hand, the Ricardian model aims to explain the very difference of cost advantage on the basis of technological difference between countries. In the first place, we will examine how Heckscher-Ohlin theory differs from the Ricardian model in explaining international trade patterns.
According to Heckscher-Ohlin theory, the cost advantage between trading countries exists due to the factors such as production, labor, and capital. The countries having land and capital in abundance with scarce labor will have an edge over others in the production of goods that require more of land and capital than labor (Heckscher, 1949). Subsequently, in such countries, the prices of goods also lie low. Ricardian theory, on the other hand, suggests that the factor of technological clout determines the trading pattern between two countries (Carbaugh, 2004).
Heckscher and Ohlin also came up with H-O model sometimes also known as 2×2×2 to further demonstrate how trade affects the distribution of income between two trading partners. According to the model, highly developed countries yield higher ratio of capital than those of developing countries. For example, goods that require more amount of labor and less capital will be relatively cheaper in a labor-abundant country. Similarly, the capital-abundant country enjoys comparative advantage.
According to Andrew Hill, “the export of goods embodying large amounts of the relatively cheap, abundant factors makes those factors less abundant in the local market. The increased demand for the abundant factor leads to an increase in return. The increase in the returns to each country’s abundant factors is made possible at the cost of the scarce factor return.” (Hill)
Leontief paradox is believed to have challenged the cogency of Heckscher-Ohlin theory. He discovered that the United States was an exporter of labor-intensive products and an importer of capital-intensive products. Hence, it would plausibly go against the outcome of factor endowment theory. Leontief believes that the factors of production must necessarily come under consideration in order to examine the theory of factor endowment. Just as there are different kinds of land namely urban, unusable, and arable required for production, forms of capital are also indispensable such as physical versus human capital being the most significant one. 
Staffan Linder came up with an assumption about the patterns of international trade. His hypothesis is that if there are similarities in the demand structure of the countries, the trade between them will increase. Moreover, international trade between two countries will also thrive they share similar preferences and factor endowments. He comes up with a demand-based theory of trade in contrast to the supply-based one. Similar demands will allow different nations to develop similar industries. Therefore these countries will also be able to trade with each other in differentiated goods as well.
A specific tariff is levied as a fix charge upon unit of imports. Many countries criticize specific tariffs as being not transparent since it gives increased and undue protection when the prices slump. The major disadvantage is that they are inequitable and as a result cheaper goods are always likely to be taxed higher than the finest ones. While others count its advantages saying that it keeps traders always aware of the price they will pay without having to refer to the price itself. Another advantage is that it can be managed cheaply and in a simplistic manner.  
An ad valorem tariff is levied as a fixed percentage of the value of the imported commodity. The main advantage of ad valorem tariff is ability to adapt itself to changing market conditions. The amount of duty ad valorem tariff is never consistent hence it goes down with the slashed and rise with the increase prices. Thus, the duty becomes quite reasonable if applied properly. However, one major disadvantage of ad valorem is that it is very difficult and expensive to administer. Since importers always tend to undervalue their goods in an attempt to evade full duty payment there are always chances of malpractices or corruption.  
Compound tariff may be defined as the combination of specific and ad valorem tariff. This kind of tariff includes two parts with one depending on the value of the commodity and the other having fixed amount. The key disadvantage of this tariff is that one is double taxed. Not only specific tariff but also ad valorem is also included alongside.

Carbaugh, R. J. (2004). International economics (9th ed.). Mason, OH: Thomson/South-Western Educational Publishing.

Heckscher, E. (1949). The Effect of Foreign Trade on Distribution of Income. Readings in the
Theory of International Trade.

Hill, Andrew. International Economics. Heckscher-Ohlin Theory. Retrieved on 26th November
2010 from:


Post a Comment