CT economics

International Trade Theories 1

ECN500 - CRN: 13907

Global Economics

Module 03: Critical Thinking Assignment

80 points

Student ID: 220001068

Student Name: Haya Alzahrani

Submission Date 16/09/2022

Introduction

Research shows that over the last two years, international trade has grown overwhelmingly. International trade is very crucial since it enables countries to become more productive, hence providing more employment opportunities to people. Additionally, international trade benefits from comparative trade since different countries are allowed to produce goods and services at a lower opportunity cost than other countries. In this essay, I will discuss the factor-price structures according to the Heckscher-Ohlin model, challenges encountered by a developing versus a developed country, and the commodities that will enable the Kingdom of Saudi Arabia to achieve a comparative advantage according to the H-O model. Good introduction.

The factor-price structures considering the Heckscher-Ohlin (H-O) model

Over the last two centuries, the international trade volume has grown steadily due to trade agreements among countries and technological advancements. International trade occurs when two or more countries exchange goods and services at a mutual price. When countries and consumers trade globally, they get an opportunity to get goods and services that are locally available in their countries. International trade and comparative advantage are somehow connected. It’s evident that international trade benefits from a comparative advantage in one way or another. For instance, most countries exploit a comparative advantage to become successful.

Comparative advantage can mostly apply to international trade in such a way that one country produces a specific good or service at a lower opportunity cost than other countries. In this case, it will be more beneficial and cheaper for the other countries to buy the goods and services from the producing country. Achieving or maintaining a comparative advantage can be very complex. In this case, the aspects of comparative advantage differ from country to country. The Heckscher-Ohlin model is a theory of comparative advantage in international trade that was established by Bertil Ohlin and Eli Heckscher (Baskaran et al., 2018). This theory best describes how the global economy was after the Second World War. The Heckscher-Ohlin theory describes a comparative advantage of international trade by considering two factors (labor and capital).

For instance, this theoretical model is used to assess the balance/equilibrium of trade between two states that have different natural resources. Moreover, the model suggests that different countries should export their goods and services according to the factors of production. For instance, countries should export those resources that they have in excess. On the other hand, they should import the resources they have in scarce. In other words, this theoretical model shows us how trading countries can operate, more so when there is an imbalance of commodities (Shen et al., 2022). Apart from improving economic efficiency, international trade can also lead to the redistribution of resources and income between various factors of production. You need to emphasize some of the strong assumptions of the model. For example, there is perfect competition, and technology and factor endowments are fixed. You need to critically evaluate these assumptions.

In addition, according to the Heckscher-Ohlin model, factor-price structures refer to the state where the costs of similar factors of production (labor and capital) and goods and services are made equal. In this case, international trade will equalize the prices earned on capital and the salaries of all employees across the world. On the other hand, in a competitive market, prices may differ from time to time between countries. In this scenario, the rental rates, wages, and marginal pro are also affected. This can only be solved through equalization. However, when countries have different production technologies, it may be very complex to equalize the production factor prices. You can provide some empirical evidence in support of your argument.

Challenges that may be encountered by a developing versus a developed nation

To be honest, most of us think that due to the advancement of technology, all countries are developed. However, this is quite the opposite. Many countries are still struggling to be economically and socially stable. I can define developing countries as those countries that have low per capita income as compared to their populations. In most cases, these countries are technologically backward, lack proper infrastructure, and have high levels of unemployment. For instance, the Philippines, Rwanda, Romania, Thailand, China, and India are some of the countries classified as developing countries. On the other hand, developed countries are those countries that have advanced technological infrastructures, rapid economic growth, and high per capita income. According to research, the World Bank has classified 81 countries as developed countries. Some of these countries include the USA, United Kingdom, Germany, France, Canada, Japan, and Italy.

Furthermore, unlike developed countries, developing countries face a lot of challenges. For instance, continuous social and economic inequalities are one of the challenges encountered by developing countries (Niebel, 2018). The social and economic equality gap between developing and developed countries is growing each day. Some factors that have affected the economic growth of developing countries include technology, human resources, physical capital, and natural resources. You need to be more focused on comparative advantage. For example, are developing countries labor abundant? Is the comparative advantage of labor-intensive goods diminishing? Developed countries mainly focus on these factors. Due to social and economic inequalities, developing countries face high levels of unemployment, low per capita income, lack of infrastructure, and low standards of living.

On the other hand, developing countries are poor due to low industrial growth. On the contrary, developed countries are industrialized hence making the developing countries to rely on them for growth. Industrialization is very essential since it reduces the levels of unemployment and poverty in a given country. Lastly, scarce human capital also affects not only developing nations but also developed ones. According to research, human capital is significant for economic growth. This can be a challenge in developing nations due to high levels of illiteracy. When a country has scarce human capital, it cannot compete in the global economy due to a lack of skills. It is therefore essential for a nation to focus and invest in human capital. You need to discuss further the challenges of developed countries. For example, they need to invest not only in price factors but in non-price factors as well. Non-price factors such as varieties of goods and quality. You can also mention the trade tensions between developed and developing countries. Developed countries impose trade barriers on imports from developing countries.

Commodities that the Kingdom of Saudi Arabia will have a comparative advantage other than oil

The Saudi vision 2030, is mainly established on three pillars that illustrate the kingdom’s unique competitive advantage. For the Kingdom of Saudi Arabia to develop a sustainable and diverse economy, it will have to put more emphasis on its investment capability. Although oil has assisted the Kingdom of Saudi Arabia to maintain its comparative advantage, the kingdom does not only depend only on oil. It is also blessed with a lot of mineral resources such as gold, uranium, copper, and phosphate (Jawadi & Ftiti, 2019). This makes it the largest country in the Middle East with a lot of minerals. According to the Heckscher-Ohlin model, nations with a lot of natural resources will have a comparative advantage in commodities that are using those natural resources. For instance, since the Kingdom of Saudi Arabia is rich in gold, uranium, phosphate, natural gas, iron ore, and copper, all products that will be made out of these resources will have a comparative advantage. The Saudi vision 2030 will ensure that the kingdom focuses on other natural resources, hence reducing its dependence on oil alone. These are good points.

On the other hand, in Saudi vision 2030, the kingdom is considering establishing gas-based heavy industries. For instance, since gases like ethane and methane are expensive to transport, it will be necessary for the kingdom to look for other alternative uses to benefit from these resources. Saudi Arabia should therefore take advantage of the above-stated natural resources by establishing more industries. According to the H-O model, such industries are capital intensive, since they require a lot of capital to produce goods.

Conclusion

In conclusion, comparative advantage is very essential for international trade since it gives countries room to make better decisions regarding resource production. The Heckscher-Ohlin model is a theory of comparative advantage in international trade that describes a comparative advantage of international trade by considering two factors (labor and capital). According to the Heckscher-Ohlin model, factor-price structures refer to the state where the costs of similar factors of production (labor and capital) and goods and services are made equal. Some of the challenges encountered by a developing versus a developed country include social and economic inequalities, low industrial growth, and scarce human capital. Lastly, the Kingdom of Saudi Arabia will have to stop depending on oil and start investing in other natural resources such as gold, uranium, phosphate, natural gas, iron ore, and copper.

Good job! You provide a good analysis of the H-O model. However, your discussion needs to be more focused on the comparative advantage when you analyze the challenges of developed and developing countries. Please see my comments in the paper and let me know if you have any questions.

References

Baskaran, T., Blöchl, F., Brück, T., & Theis, F. J. (2018). The Heckscher–Ohlin model and the network structure of international trade.  International Review of Economics & Finance,  20(2), 135-145.

Jawadi, F., & Ftiti, Z. (2019). Oil price collapse and challenges to the economic transformation of Saudi Arabia: A time-series analysis. Energy Economics,  80, 12-19.

Niebel, T. (2018). ICT and economic growth–Comparing developing, emerging, and developed countries. World Development,  104, 197-211.

Shen, J. H., Long, Z., Lee, C. C., & Zhang, J. (2022). Comparative advantage, endowment structure, and trade imbalances.  Structural Change and Economic Dynamics,  60, 365-375.

The references are good. A good reference about the Leontief Paradox is:

Paraskepovoulou, C., Persefoni, T.,& Lefteris. T. (2016). Revisiting Leontief Paradox. International Review of Applied Economics, 30(6), 693-713.

The grammar and organization are good.