Economic Basis for Trade and Political Basis for Opposition: Comparative Advantage vs. Heckscher Ohlin Theory

Question 1

Economic Basis for Trade (Comparative Advantage, Relative Advantage, Opportunity Cost)

Answer 1

(a) countries have uneven distribution of factors of production (these capabilities change as a country advances)
(b) absolute advantage: when a country is the best at producing a good/service
(c) comparative advantage: results when there is a difference in opportunity cost

Question 2

Heckscher-Ohlin Theory

Answer 2

(a) differences in resources –> differences in productivity –> trade patterns
(a. i) countries have relative abundance of a factor of production –> will export goods that are intensive in their abundant factors of production and import goods that are intensive in their scarce factors of production
(a. ii) this will raise the price of exports

Question 3

Political Basis for Opposition to Trade

Answer 3

From an overall perspective, even though everybody wins, some people lose –> interest groups to lobby the government for protectionist policies