1. What is necessary for a country to gain from trade in neoclassical theory? Ho

Question

1. What is necessary for a country to gain from trade in neoclassical theory? How does one know if a country has gained from trade?

2. What is meant by the trade triangle? Why must the trade triangles of the partner and the home country be congruent in a two-country analysis?

3. Within what range must the international terms of trade lie?

4. What is the basis for trade according to Heckscher-Ohlin? What products should a country export? Why?

5. Explain why the K/L ratio in each industry will rise with the initiation of trade in a labor-abundant country and will fall in a capital-abundant country.

6. Explain the difference between factor- intensity reversal and demand reversal. Do they have similar effects on the validity of the H-O theorem?

Explanation / Answer

1.According to neo classical theory, countries trade in the goods becuase of the difference between technology or natural resources. Countries have different opportunity cost of producing the goods and each country specialises in the good for which it has lower opportunity cost. This phenomenon is called comparative advantage basis. Thus we can say that it is necessary for countries to specialise in the good for which it is has comparative advantage gain from trade.

When consumption possibilities have increased after trade, that is more goods are consumed in the country, it means country has gained from trade.

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