100%(2)2 out of 2 people found this document helpful
This preview shows page 37 - 39 out of 48 pages.
The model was then refned by Hecksher and Ohlin, resultng in the factor endowment tradetheory. This neoclassical model of free trade postulates that countries tend to specialise in the producton of commodites that make use of their abundant factors of producton, e.g. land, labour, capital, etc. The model assumes that all countries have access to the same technological possibilites for all commodites. The basis for trade arises from the diferent factor supplies rather than inherent technological diferences in labour productvity. Countries with cheap labour have a relatve lower cost and price advantage over countries with relatvely expensive labour. The low-labour cost country should, therefore, focus its producton on the labour-intensive commodites, whereas the country with relatvely large capital injectons must specialise in capital-intensive industries.The theory is based on two crucial propositons:1.Diferent products require productve factors in diferent relatve proportons:Agricultural products need more labour, whereas manufactured products are relatvely capital-intensive2.Countries have diferent endowments of factors of producton:Some countries are labour-abundant, others are capital-abundantIn the factor endowment model, natons are assumed to operate at some point on their concave producton possibility fronter, determined by domestc demand conditons. The main conclusions from the neoclassical model are:-All countries gain from trade-World output is increased-Complete specialisaton, due to opportunity costs, does not occur-Countries specialise as much as possible in commodites using their abundant resources-Countries import products for which they themselves have scarce resourcesDownloaded by Jin .Y ([email protected])lOMoARcPSD|4182995
-Rising domestc costs prevent complete specialisaton from occurring-Factor price equalisatonoccurs due to identcal technologies. This is the propositon that since countries trade at a common internatonal price rato, factor prices among trading partners tend to equalise-Wage rates rise in labour-abundant countries as a result of more intensive use of human resources-Price of scarce capital declines due to the diminished producton of manufactured goods-Trade is assumed to stmulate economic growth-The economic return to owners of abundant resources rises in relaton to owners of scarce resources since the abundant factors are used more intensivelySix basic assumptons of the traditonal neo-classical trade model must be scrutnised:1.All productve resources are fully employed and fxed in quantty and quality across natons2.The technology of producton is fxed or similar and freely available to all natons3.Factors of producton are perfectly mobile between diferent producton actvites4.The natonal government plays no role in internatonal economic relatons5.Trade is balanced for each country at any point in tme6.The gains from trade to any country beneft the natonals of that countrySome of the critcisms form the ratonale for other, non-neoclassical theories, such as the North-South model, the