Heckscher-Ohlin theory best explains the pattern of international trade between different countries specializing in the production of different goods with the help of comparative cost advantage and their capital abundance in certain resources.
While, Ricardian’s factor endowment theory reasons that with free trade, the internal distribution of national income in a certain country will change in favor of labor.
The Heckscher-Ohlin theory with the help of comparative advantage principal explains that every country should concentrate their production more into producing those goods in which they have resources in abundance and import only those goods in which they lack potential resources. This efficient allocation of resources will result in a much better distribution of income as well as an increase in productivity ( Dixit & Norman, 1980).
However in 1954,Wassily Leontief challenged this when he evaluated the procedure of the US foreign trading and found that despite the abundance of capital in the US economy, their exports were more labor intensive( manufactured by the laborers) and imports were more capital intensive( more usage of machinery and technology).( Mattoo,Stern & Zanini,2007).
Answers to the questions by audience:
A Specific Tariff is one that is levied on raw materials and food stuffs imported (based on their weight, number, length, volume). The disadvantage would be that it could result in retaliation from other foreign economies, which could mean import control on goods that we export leading to higher prices and potential inflation. But the country from which we are importing goods will benefit by increase in their foreign exchange by these import duties.
Ad Valorem Tariff is the most commonly used tariff and it is usually a percentage of the monetary value of the imports (Rivera-Batiz & Oliva, 2004).
Compound duties are duties or tariffs that are levied on manufactured goods and on raw materials that are imported by different countries. One drawback is that it becomes expensive for companies to operate which rely on foreign imports of raw materials for their production process(Rivera-Batiz & Oliva, 2004).
REFERENCES:
Dixit, A. & Norman, V. (1980). Theory of International Trade: A Dual, General Equilibrium Approach . Cambridge University Press
Mattoo, A., Stern, R.M. & Zanini, G. (2007). A Handbook of International Trade in Services. Oxford University Press
Rivera-Batiz, L.A. & Oliva, M.A. (2004). International Trade: Theory, Strategies, and Evidence. Oxford University Press
