Trade In The Ricardian Model Case Studies Examples

Heckscher-Ohlin Model states that the pattern of trade between countries depends on the type and abundance of factors of production. Therefore, a state that is capital abundant will produce more and export capital-intensive commodities, but will import labor-intensive products. Rybczyski effect says that a change in factor endowments in a country will cause a change in the quantity of the product that uses the factor in production. For instance, an increase in labor supply will lead to an increase in the amount of labor-intensive products (Salvatore 79) . Production Possibility Frontier is a curve showing all the possibilities of the maximum quantities of two or more commodities a country can produce given a set of inputs. HO theory assumes a country with only two products and two inputs, labor and capital. One commodity is labor-intensive with the other one being capital intensive. Points along the curve indicate points at which production of the two goods, clothing and food, is efficient. The frontier's position is determined by the amount of resources or factors of production a country owns. The curve is concave and slopes downwards. This is because when a country is producing both commodities efficiently, it has to reduce the quantity of food in order to produce more units of clothing. The slope of the curve is, therefore, negative.

Food

QF2
PPF2
QF1
Isovalue line
PPF1
QC2 QC1 Clothing
Isovalue lines are lines showing combinations of quantities of clothing and food that give the same market value (Salvatore 79). In order to determine the output mix, Isovalue lines are drawn, and the point at which an Isovalue is tangent to the PPF gives the optimal output mix. The slope of the Isovalue line is the ratio of the relative prices of capital and labor. In the above diagram, QC1 and QF1 are the optimal quantities of clothing and food respectively.
Rybczyski effect will occur if there is an increase in capital stock in the economy. The economy will experience an expansion leading to an outward shift in the PPF, as shown above. Since food is more capital-intensive than clothing, there will be a biased expansion of production possibilities as more food will be produced while the quantity of clothing will decline (Salvatore 79). Quantity of food will increase to QF2 while that of clothing will fall to QC2. The new mix will be higher than the original mix although amount of clothing will be less than the original one.

Works cited

Salvatore, Dominick. International Economics. Hoboken, N.J.: Wiley, 2011. Print.