Ricardian and Heckscher–Ohlin Models of Trade

Ricardian and Heckscher-Ohlin models of trade generally describe countries’ differences. Further, they give important insights into patterns and determinants of trade.

Ricardian Model

The Ricardian model is a modification of Adam Smith’s absolute advantage theory. Adam Smith states that countries can benefit from trade if they produce a specific good at a lower cost than their foreign counterpart and then trade their own product with a product they cannot produce, at a lower cost. David Ricardo further fortifies Smith’s absolute advantage theory by arguing that a country without absolute advantage in international trade could still benefit from trade through comparative advantage.

According to this model of comparative advantage, technology is responsible for the differences in labor productivity. Ricardo states that labor does not give a comparative advantage without differences in the degree of technological advancement among nations. Ricardo’s comparative advantage is a profit-maximizing solution for capitalists. This is because of infrastructures and goods that require different factors of production. However, all nations will not appreciate the need for them to trade with one another.

Heckscher-Ohlin Model

The Heckscher-Ohlin model is a mathematical model of international trade. It was developed by Bertil Ohlin and Eli Heckscher. The model is based on David Ricardo’s theory of comparative advantage.  It forecasts patterns of production and commerce. Generally, it states that nations exporting products use their cheap and abundant factors of production and import products that consume scarce factors.

Factors of production, such as capital and labor, determine a state’s comparative advantage. Nations have comparative advantages in goods that need factors of production that are scarce within their borders. This is because profits that goods plow back depend on input costs. Goods that require locally available inputs will be cheaper to produce than those that require scarce inputs. For instance, if country X’s capital and land are locally available but labor is scarce, it will have a comparative advantage in goods that require a lot of capital and land but little labor.

Question

Comparative advantage in the Ricardian trade model theory is determined by its:

1. Technology.
2. Capital to labor rati.
3. Level of labor productivity.

Solution

The correct answer is A.

According to the Ricardian model, the difference in technology among nations causes output per worker in each country to differ.