Save 30% on all 2023 Study Packages with Code: BLACKFRIDAY30. Valid until Nov. 28th.

Ricardian and Heckscher–Ohlin Models of Trade

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.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop GMAT® Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.