How does the Heckscher-Ohlin model explain the basis of comparative advantage? Also, critically discuss the policy implications of this model for developing countries.

Essay by alvinliu80University, Bachelor'sC+, March 2004

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As the Nations in the world become closer and closer nowadays, the international trade seems to be another way for them to communicate with each other. Obviously everyone knows that some international trade is beneficial, while nations generally gain from international trade, however it is quite possible that international trade may hurt particular groups within nations. The reason that international trade produces this increase in world output is that is allows each country to specialize in producing the good in which it has a comparative advantage. A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries.i.e labour cost is cheap in China, so China has a comparative advantage in labour output. According to classical economists, comparative advantage was based on the difference in the productivity of labour among nations, but they provide no explanation for such a difference in productivity, except for possible differences in climate.

The Heckscher-ohlin theory emphasizes the interplay between the proportions in which different factors of productions are available in different countries and the proportions in which they are used in producing different goods, it is also referred to as factor-proportions theory that international trade is largely driven by differences in countries' resources is one of the most influential theories in international economics.

The factor proportions model was originally developed by two Swedish economists, Eli Heckscher and his student Bertil Ohlin in the 1920s. Many elaborations of the model were provided by Paul Samuelson after the 1930s and thus sometimes the model is referred to as the Heckscher-Ohlin-Samuelson (or HOS) model. In the 1950s and 60s some noteworthy extensions to the model were made by Jaroslav Vanek and so occasionally the model...