Evidence from research and practice has indicated that countries are endowed with different resources or the same resources but in differing levels. Besides, the factors of production differ across countries. Hence, trade between countries takes place because the different nations engaging in the transactions benefit in the process. Countries engage in trade because they differ and that they have some resources and factors of production that are not in another or they are not at the same level in terms of these elements (Feenstra 6). Based on the efforts to achieve the economies of scale in terms of production, countries are involved in the international trade. Countries generate only a limited amount of goods and to ensure that it has adequate to cater for the needs of their people they trade with other nations which are producing in surplus. Hence, the model behind international trade is the benefits accrued by the trading partners through engaging in the exchange. The Ricardian and the Heckscher Ohlin Model of international trade are among the models proposed to explain the foundation and nature of international trade.
The Ricardian Model of International Trade
The theories of international trade underlie the differences in “labor, labor skills, physical capital, natural resources, and technology” across countries. Another theoretical background is the basis for the achievement of economies of scale because no single country is capable of producing enough to cater for the needs of its people. The concept of comparative advantage is the basis for the Ricardian model of international trade. Different countries produce diverse goods based on the idea of comparative advantage. The country has the products that it can produce cost-effectively (Krugman, Obstfeld, and Melitz 11). A country, hence, specialises in the production of what it is endowed with, in terms of resources and factors of production, and trade in another product that is produced in another nation. A good example is the comparative advantage in South America in terms of production of winter roses and the comparative advantage in the United States in the production of technology. In fact, the manufacturing of products that are not available in other countries targeting to sell them to those nations forms the basis for the development in international trade.
The supply and demand rule is the basis for the determination of trade between countries. There is no law governing what each country should produce and how the products should be used. For example, a country can choose to produce whatever product with the available resources and use it locally. However, the actual gains are achieved by engaging in trade between nations. Countries are endowed with limited resources which mean that they have to give up production of other products and focus on a product it can produce efficiently. Hence, to manufacture one product at the level that can benefit the country, it has to sacrifice the production of others (Krugman, Obstfeld, and Melitz 12). At the same time, the country is capable of obtaining the products that it is not able to produce locally and to sell the surplus of the products it is able to produce, for financial gains. Standards of living improve in the process and the benefits are experienced across the trading partners.
The graph below explains the theory in terms of the trade-offs critical in the production of one product at a level that it can benefit the economy. A good example is a country that has the potential to produce wine and cheese. The unit labour requirement is the labour productivity in each industry; the hours of labor critical to produce a gallon of wine or a pound of cheese. Because of the limitation in terms of the factors of production, one of the products has to be sacrificed for the other to be economically produced. The graph indicates the tradeoffs involved in the production process (Krugman, Obstfeld, and Melitz 12). It is not economical for a country to produce both products at the level critical for the economic benefit of the country because of the limitation in resources and factors of production.
As a rule, the products that a country will capitalise on are those that will consume less in terms of resources and labour for the sake of the economies of scale. The product produced will be one that will not require high cost in production, especially if there is another country that can produce the same product at a lower cost (Krugman, Obstfeld, and Melitz 19). It is critical to produce a product that a country can manufacture efficiently and sell it to get the products that the country is not economically endowed to produce. Also, in the event that the country is able to trade, it allows for an effective mix of the products to consume from others. Even through indirect production, getting from the country where the product can be efficiently produced, the two countries involved in the international trade get to benefit (Krugman, Obstfeld, and Melitz 19). This is the basis for allowing free trade where the barriers to trade are eliminated and countries can freely trade with each other.
The Heckscher-Ohlin Model of International Trade
From the perspective of the Ricardian model, the main concern in the assessment of the comparative advantage is labor. The international differences in labor are the basis for the comparative advantage. However, in reality, labor is not the only factor of production that forms the basis for international trade. Hence, to have a more comprehensive view of international trade, it is critical to consider the other factors of production, including capital, land, and mineral resources (Hamminga 28). Differences in resources play a critical role in the ability of a country to produce a product and the capacity to trade in the product with other countries (Krugman, Obstfeld, and Melitz 67). Therefore, comparative advantage can be considered from the perspective of the resources a country is endowed with and the technology available to allow efficient production. The endowment of resources is not at the same level for countries and in the production of a particular product.
The factor proportions model proposed by Ohlin tends to reveal the traditional lacuna of putting emphasis on the role played by one factor, labor, in the determination of comparative advantage (Neary 671). It is not enough that only one factor is viewed as the basis for providing an advantage to a country in terms of producing a particular good. The theory suggests the quality of more than one factor, but the interplay of important forces involved in the production process (Novy 102). Hence, the quality of all the factors of production plays out in determining the potential of a country to produce a good and trade it in the international market. The emergence of international trade is based on the quantity and not quality of all the factors of production. The model lays out the combination of factors as they differ in different regions and the production of the different goods traded within the international market.
The model is also based on the comparative advantage in producing a particular product, but abundance and intensity of resources are given more emphasis in the Heckscher-Ohlin model of international trade. From this theoretical perspective, the foundation of international trade is the differences in labor, labor skills, physical capital, capital, as well as other factors of production across countries. The model indicates that countries are different in terms of relative abundance of factors of production. In this case, the factors of production are used with differing relative intensity in the production process. Hence, a country with relative abundance in terms of resources to produce a specific product and can use the resources with relative intensity is better placed than another to produce and trade in the product (Krugman, Obstfeld, and Melitz 67). Unlike the Ricardian model which is only focused on labor, the emphasis is on the interplay between the different factors of production in generating a product. The different factors exist in differing proportions and affect the production process differently.
As opposed to the Ricardian model, the Heckscher-Ohlin theory presents a more all-inclusive view of the international trade. The reality is that the production process is interplay of different factors of production and none can be ignored if a proper comprehension is to be achieved. The model presents a scientific effort in explaining the structures of international trade (Helpman and Razin 15). It presents the ultimate basis of international trade as the diversity in production factor endowment in different countries and regions globally. While the former model is focused on the gains of international trade to the trading partners, the Heckscher-Ohlin model tends to focus on the foundation of international trade (Krugman, Obstfeld, and Melitz 67). The factor-proportions theory indicates the reality that countries cannot exist without trading because they have differences in terms of the factors of production and cannot produce adequate products to sustain itself. A country is only able to abundantly produce goods that it has the resources and factors of production to efficiently produce.
In the event that there are two products that are competing for the same resources in the same country, the production will focus on the product that does not use a lot of resources because of the economies of scale. This is because the high cost of resources and factors of production will impact on the ultimate price of the product. It is always economical for a country to produce those goods for which they have adequate resources to produce and trade in them while at the same time source goods that they are not able to economically produce, forming a strong basis for international trade (Feenstra 43). Both capital and labor are the basis for the possibility of producing a product. In the event that the two factors are high to produce a good, then it makes more economic sense for the country to buy from those countries with low-cost labor and capital cost to produce the same good.
It is always critical to ensure that the opportunity cost is not so high that production of a good does not make any economic sense. Hence, in the event that a country is devoting a lot of resources in the production of one good, the opportunity cost is elevated due to the low marginal productivity. Hence, the model proposes the basis for international trade from the perspective of preventing the chances of elevated opportunity costs (Bowen 163). Where international trade abounds, countries are shielded from the elevated opportunity cost because resources are committed to production of the goods that they can economically produce. Each country in the international order has the resources it can use to produce a particular good with relative opportunity cost (Bernard et al. 312). Production under the conditions allows for countries to have the continued need to trade with others to get those goods they cannot produce at home.
Two models of international trade are used in explaining the emergence and importance of international trade, the Ricardian model and the Heckscher-Ohlin theories. The two differ in their emphasis on the factors that play a role in the emergence of international trade, with the Ricardian model emphasizing on the role of quality labor, while the Heckscher-Ohlin focuses on interplay of resources and factors of production. While the former emphasizes on the benefits of international trade, the latter emphasizes on its foundation. From the evaluation of the two theories, the latter is best suited to explain the nature of international trade as the interplay of factors of production as opposed to only considering one factor that plays the role.