Description
Answer all the questions on 5-6 pages
International Trade Theory and Policy
1) Explain the meaning of each of the three basic "theorems" of international trade theory; i.e. the "H-O", "FPE" and "Stolper-Samuelson" (SS) models, including the assumptions under which the hold.
2) After WWII every economist was sure that the US was a relatively capital-abundant economy (having not been directly bombed during the war), but V. Leontiev cast doubt on this. Explain.
3) Suppose that the Production Possibilities Frontier (PPF) now expands. Explain:
a) the Rybczynski Theorem
b) the possibility of "immiserizing" growth
c) the "Metzler" paradox
Explanation & Answer
Attached.
Running Head: INTERNATIONAL TRADE THEORY AND POLICY
International Trade Theory and Policy
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INTERNATIONAL TRADE THEORY AND POLICY
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Meaning of each of the Three Basic "Theorems"
Heckscher-Ohlin (H-O) model
This is an economic theory that was developed by E. Heckscher and B. Ohlin. Which
explains that any given country can export what can be plentifully and efficiently produced.
The model is utilized during the evaluation of the trade especially when analyzing the
equilibrium aspect of the market between two countries that have a significant variation in
natural Resources and specialties. This model emphasizes goods exportation which requires
factors of production that a given state got in abundance and the goods importation which a
given country constraint in its efficient production (Feenstra, 2015).
The crucial assumption of this theorem is that the two involved countries are similar,
except the endowment of resources. This shows that the cumulative preferences are identical.
The relative capital abundance shall cause the nation with plenty of capital to produce a
capital-intensive product which is cheaper compared to the labor-based country and vice
versa (Feenstra, 2015).
Factor Price Equalization model
Feenstra (2015) explains that FPE is an economic model that was developed in 1948
by Paul A Samuelson. It states the prices of similar factors of production for instance rent of
capital or wage rate shall be equalized across given countries due to commodities in the
international trade. The theory uses an assumption that there are two factors of production
and two goods, i.e., labor and capital. It also assumes that each nation faces the same price of
the commodity due to commodity free trade which uses the same production technology and
carries out production of both goods. Critically, these assumptions do lead to equalization of
INTERNATIONAL TRADE THEORY AND POLICY
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factor prices across states without factor mobility need, for example, capital flows or
migration labor.
Concerning factors in the market, whichever receives the highest price tends to
become cheaper in the case where this is done before the involved countries merge and
integrate economically to efficiently become one market an...
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