Ricardian / HOS Model Flashcards
Assumption made on value of imports and exports?
Value of exports = Value of imports
Aim to abstract from monetary influences on international trade flows.
This is known as the balanced trade assumption.
RM Model assumptions :
Two countries and two goods
Single factor of production - Labour
Constant productivity - Each country has a fixed level of productivity / labour hrs per unit.
Perfect competition - Prices reflect labour input
Full employment - All resources are fully employed in both countries
There must be CA! (Eg. Portugal wine, England cloth)
Who / when made the RM Model?
What was its aim?
During which period of economics?
Whose economic theory did it challenge?
Whose work did it build on?
Developed by David Ricardo, a British Economist.
Aim : Benefits of trade between countries based on comparative advantage.
Book : Principles of Political Economy and Taxation (1817)
During the Industrial Revolution, when countries were specialising in specific goods.
It challenged Mercantilism, which emphasised accumulating wealth through trade surpluses.
Built on the work of Adam Smith’s theory of absolute advantage. Which emphasised that countries should specialise in which their are most efficient/ have absolute advantage.
HOS model assumptions
Two countries, two goods, two factors of production.
Difference in factor endowments across countries - Labour / Capital abundant. (Drives CA!)
Identical production technology (Different to RM)
Perfect competition.
Full employment.
Labour and Capital can move within a country between industries, but not internationally.
Constant returns to scale.
No transportation costs or trade barriers such as tariffs.
Tastes / Preferences are identical across countries.
Factors of production (L and K) can substitute for each other to some extent
If K abundant - Lower returns to Capital
If L abundant - Lower wages
Technology has CRTS
No Factor Intensity Reversals. Ranking of Kx/Lx and Ky/Ly same for all w and r
What does HOS stand for?
When / where was is developed?
Extended on whose model?
Main idea of HOS model from Heckscher?
Improvement to model from Ohlin?
Improvement to model from Samuelson?
Heckscher Ohlin Samuelson model in 20th century.
Developed by Swedish economists Eli Heckscher and Bertil Ohlin, later contributed to by Paul Samuelson.
Evolved over decades from trade theories such as Ricardo’s
Main idea was export goods that use abundant resources intensively and import goods which require scarce resources.
Ohlin’s improvement - CA arises from factor endowment differences. (Not just labour productivity in RM model)
Samuelson improvement - Refined Mathematical structure. Helped integrate HOS model into modern neoclassical economics.
Limitations to HOS model in assumptions + paradoxes in real world?
Assumes countries have same technology.
Assumes no trade barriers
Leontief Paradox (1953) :
- US regarded as capital intensive country
- Contradicted Imports / Exports data
- Caused by US technological advantage, making it seem as if goods were more K intensive.
RM limitations
Assumes one factor of production, ignores capital, land and other resources.
Ignores whether goods are labour or capital intensive.
Constant returns to scale in production. Ignoring increasing returns to scale.
Labour is fully mobile within a country. Workers may not have skills required. Geographic and institutional barriers limit value mobility.
Perfect competition in product and labour market. In real - Monopoly, Oligopoly, pricing strategies such as dumping.
Technology same across countries. Some countries can adopt or develop technologies to enhance productivity.
Does not account for trade costs and trade tariffs.
Homogenous goods. In reality goods vary based on quality, brands and features.
Income = Outcome. International trade can create winners and losers, leading to income inequality.
No environmental considerations. Environment could degrade as a result of specialisation in trade.
No scope for modern trade patterns.
- Intra industry trade, trade of cars Germany and Japan
- Global chains, production across countries (Airbus)
AA meaning and definition
Mathematical definition
Graphical definition
Absolute Advantage
Output per worker (productivity) in X is greater in country A
Xa>Xb
PPF intercept in X is higher if La = Lb
Relevant to RM only, HOS assume countries have same technology/ production across countries.
CA meaning and definition
Mathematical definition
Graphical definition
Opportunity cost of a unit of X is lower in country A
ya/xa < yb/xb
PPFa is flatter that PPFb
CA relavant in RM and HOS
Equation for if Country A is capital abundant?
Equation for if industry Y is capital abundant?
Ka/La > Kb/Lb
Ky/Ly > Kx/Lx
