Attempt the following questions. Justify your answers. a) Explain how was the Ri
ID: 1189266 • Letter: A
Question
Attempt the following questions. Justify your answers.
a) Explain how was the Ricardian model tested empirically
b) To what extent can we assert that the Ricardian model provides a good representation of the real world
c) Do we need to build other models to help us understand the real world?
Attempt the following questions. Justify your answers.
a) What are the differences between the Hecksher-Ohlin Factor Endowments model of international trade and the Comparative advantage model?
b) What are the similarities between the Hecksher-Ohlin Factor Endowments model of international trade and the Comparative advantage model?
c) According to the Hecksher-Ohlin Factor Endowments model is it still true that free trade will benefit both nations?
Explanation / Answer
In the Ricardian model, cross country differences in relative prices are due to differences in labor requirements. One country may use less labor in all its industries. Its absolute advantage in efficiency, however, does not prevent it from trading beneficially with other, less efficient countries. It will have a comparative advantage in those activities where its absolute advantage is largest.
Empirical work on the Ricardian model confirms the model’s predictions concerning the effects of cross country differences in productivity and wage rates on the composition of trade.
Economic models can never be completely realistic. If they were not simpler than the real world, they could not help us to cut through complexities and organize our thinking. The Ricardian model is far too simple to describe precisely the cause and effects of international trade. The main statements made by the model, however, highlight important relationships, and some of them are verifiable. They can be used to forecast actual trade flows, despite the existence of tariffs and other trade barriers.
Yes. We need to build other models to understand the real world, as different models take into consideration different aspects of the real world to give as much as realistic result as possible.
Differences between the Heckscher Ohlin model and the Comparative advantage model – Firms producing the same commodity compete with each other in the international market. In equilibrium, they cannot be more expensive than their foreign competitors. If they are, they will lose the market share until the equilibrium is reached and factor prices are the same again. Once the factor prices are equal in the two countries, so will production costs. But until factors prices are equal, cost differences will determine the competitive position of the firms.
Similarities – Both the models suggest that, a country which has an absolute advantage in producing a product will trade that product with the other product in which it does not have an advantage.
Yes. It is still true that free trade will benefit both nations, as it will be cost effective in getting the product which would otherwise be costly to produce in one nation.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.