The trade model of the Swedish economists Heckscher and Ohlin maintains that:

 Options:

a. Absolute advantage determines the distribution of the gains from trade. b. Comparative advantage determines the distribution of the gains from trade. c. The division of labor is limited by the size of the world market. d. A country exports goods for which its resource endowments are most suited.

The Correct Answer Is:

d. A country exports goods for which its resource endowments are most suited.

Correct Answer Explanation: d. A country exports goods for which its resource endowments are most suited.

Heckscher-Ohlin theory, a cornerstone in international trade economics, asserts that countries export goods that align with their abundant factor of production. This theory, often termed as the factor proportions theory or the Heckscher-Ohlin-Samuelson (HOS) model, elaborates on the determinants of comparative advantage in trade.

The correct option, “d. A country exports goods for which its resource endowments are most suited,” encapsulates this theory.

In detail, Heckscher-Ohlin theory delves into the idea that countries possess differing factor endowments—resources like labor, capital, and land—where some countries might have more abundant labor while others possess ample capital.

The theory posits that countries will export goods that intensively use their abundant factor and import goods that use the scarce factor.

For instance, a country with a surplus of skilled labor (abundant resource) but scarce unskilled labor will export goods that require a high skill labor input and import goods that require unskilled labor.

This happens because producing skill-intensive goods capitalizes on the comparative advantage that arises from the abundant resource, making it more cost-efficient to produce such goods domestically and export them.

Now, let’s examine why the other options are not accurate:

a. Absolute advantage determines the distribution of the gains from trade.

This statement relates to the theory proposed by Adam Smith, which suggests that countries should specialize in producing goods where they have an absolute advantage, i.e., being more efficient than other countries in producing a particular good.

However, Heckscher-Ohlin theory goes beyond absolute advantage and focuses on comparative advantage derived from factor endowments rather than absolute productivity. Therefore, this option is not correct according to the Heckscher-Ohlin framework.

b. Comparative advantage determines the distribution of the gains from trade.

This option seems close to the essence of Heckscher-Ohlin theory. Comparative advantage indeed plays a crucial role in international trade, but Heckscher-Ohlin theory specifically emphasizes that comparative advantage arises from differences in factor endowments among nations.

It’s not merely about the relative efficiency in producing goods, as in David Ricardo’s theory of comparative advantage, but about the factor proportions underlying production. Thus, while comparative advantage is a vital concept, the Heckscher-Ohlin model shifts the focus to factor endowments determining trade patterns.

c. The division of labor is limited by the size of the world market.

This statement isn’t in line with Heckscher-Ohlin theory. The theory doesn’t directly address the limitation of the division of labor by the size of the world market. Instead, it concentrates on how factor endowments determine a country’s comparative advantage and trade patterns based on those endowments.

The theory assumes that factors like technology, transportation, and market size are given, and it primarily focuses on factor abundance as the driver of trade specialization.

In summary, Heckscher-Ohlin theory’s core premise revolves around a country’s resource endowments determining its comparative advantage in international trade.

The theory provides a framework for understanding trade patterns based on factor abundance, contrasting with theories emphasizing absolute advantage or solely focusing on comparative advantage derived from productivity differences.

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