International Economics Essay Example | Topics and Well Written Essays - 2000 words

International Economics - Essay Example According to this theory the two countries will gain from trade if each country specialises in the production of that good which it has a higher comparative advantage. We assume that the given numerical figures are the costs of labour in the production of good 1 and good 2 in both countries, from the above table it is clear that country A has absolute advantage in the production of both goods but according to the comparative advantage theory the two countries will still gain by trading From the analysis of the comparative advantage it is clear that despite country A having absolute advantage in the production of both goods it even more efficient in the production of good 1, for country B it is less disadvantaged in the production of good 2. for this reason country A will produce good 1 and country B will produce good 2 and they will gain from trading. Therefore trade will offer a country an opportunity to specialise and therefore countries will reallocate factors of production to those goods in which it has comparative advantage in and therefore gain in the process. Hecksher ohlin trade theory states that trade occurred due to factor endowment, factor endowment according to him meant that a country was either endowed with capital or labour, he stated that those countries that were rich in capital produced capital intensive goods while those that were rich in labour produced labour intensive goods. Capital intensive goods are those goods that require more units of capital per unit of production, while the labour intensive goods are those goods that require more units of labour per unit of production. Factor endowment therefore refers to the amount of resources has, however this theory was based on the assumptions that there were no transport costs, perfect competition in the commodity and factor market, only two goods are produced where one good is labour intensive while the other is capital intensive and the final assumption is that the production function differ