Comparative Advantage II: The Neoclassical Model (KEMENY)

Question 1

Ricardo (classical)

Answer 1

Trade premised on exogenous differences in

productivity/technology

Question 2

Heckscher-Ohlin (neoclassical)

Answer 2

Trade premised on exogenous differences in factor

endowments

Question 3

What is a ‘factor of production’

Answer 3

Economists and economic geographers use this term to describe inputs into making a good or service

Question 4

Assumptions for neoclassical

Answer 4

• Trade in goods is costless
• Factors move freely across industries but
not countries
– In this case workers are immobile
• Identical technology
• Identical preferences and goods (withinindustry)

Question 5

Initial insight from the H-O model:

Answer 5

– There is a relationship between abundance,
intensity, and trade patterns
The big theorem:
• Countries specialize in goods intensive in the
factor in which they hold in abundance

In our example
UK: abundant in skilled workers -> computers
China: abundant in unskilled worker-> shoes

Question 6

Autarky

Answer 6

– Price of computers in terms of shoes bid down in UK, as abundant skilled workers renders skill-intensive good cheaper
• Relative prices: Pcomputer/Pshoe
– Price of shoes in terms of computers bid down in China, as unskilled workers are abundant (hence cheap)
• Relative prices: Pshoe/Pcomputer