Q.1: State and explain the concepts of factor abundance and factor intensity. (2
ID: 1133073 • Letter: Q
Question
Q.1: State and explain the concepts of factor abundance and factor intensity. (2 points)
Factor abundance is a bilateral concept in factor proportions trade theory that has no definition when there are many countries and various factors of production. The present paper proposes a general definition, the Euclidean distance to the intersection of abundance rays with unit hyperplanes. Distance factor abundance is compared with other measures using a data set from the literature.
Q. 2: Using the concepts above, state the Heckscher-Ohlin Theorem and explain its meaning in realistic terms. (2 points)
Q. 3: How is Heckscher-Ohlin Theorem different from Ricardian argument for international trade? (3 points)
Q. 4: State and explain the meaning of three assumptions that are needed to make Heckscher-Ohlin Theorem and are different from Ricardian Theory of Comparative Advantage. (3 points)
Explanation / Answer
1.
In factor proportion theory, factor abundance is a concept based on relative endowments of productive factors across countries. Countries export goods which are produced using abundant factor or factors. Similarly, factor intensity means the same thing, countries trade based on their relative factor intensity as can be seen in the Heckscher- Ohlin model.
2.
Heckscher-Ohlin theorem states that international trade occurs as countries differ in their relative factor endowments and commodities differ in their relative factor intensities. Countries gain comparative advantage in those goods for which factors of production are abundant will be cheaper to produce than those that require scarce inputs.
3. In Ricardo model, there is only one factor of production compared to the Heckscher-Ohlin model there are two factors of production hence the concept of relative abundance is introduced and input intensity differs across countries.
4.
The first assumption is based on comparative advantage based on the difference in labor productivity in Ricardian theory whereas it is based on the difference in factor intensity in the Heckscher Ohlin model. The second is the difference in skills and efficiency of labor is responsible for difference in costs but in the long run these are eliminated in the classical theory whereas in H-O theory factor intensity exists in the long run. Third assumption is the failure of the classical case in explaining the comparative difference in costs and international trade specialisation.
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