INTERNATIONAL ECONOMICS AND FINANCE Essay Example | Topics and Well Written Essays - 2000 words

INTERNATIONAL ECONOMICS AND FINANCE - Essay Example The two eminent theories of Heckscher-Ohlin and Ricardian theory of international trade by David Ricardo have been discussed below. An introspection of the two theories provides an insight of the main controversies in the field of international trade and the current problems in policy that is affecting international trade. The Ricardian model explains comparative advantage in international trade by taking into account factors like natural resources and technology advancements of a country. The factors of comparative labour and capital have not been considered by Ricardo while explaining comparative advantage. The Heckscher-Ohlin model of international trade on the other hand assumes that the labour and capital are abundant resources that vary from one country to another and technology in long term prospects are assumed to be same. Heckscher-Ohlin derived that a country exports such goods that make optimal utilisation of local factors and imports those goods which could not make use o f available factors. David Ricardo: Ricardian theory of international trade International trade is necessary for the sustenance of globalization. ... Ricardian theory, however, holds the underlying assumption that the labour is the primary input for production and the trade at international stage occurs due to relative ratios of labour of the different nations (Rivera-Batiz and   Oliva, 2003, p.4). The other assumptions in the Ricardian model of international trade says that the labour as an input of production of the countries is also inelastic and there is no cost of transportation and no international trade barriers. The theory of comparative advantage has been explained by two factors namely, the opportunity cost and the production possibility frontier. The opportunity cost of the countries can be determined as the loss incurred for a certain production due to increase in another production. In international trade theory, the opportunity cost to a country is the decrease in cost of production arising out of scarcity of some factors for which the country imports goods and services from another country where those factors are present. The countries would carry out international trade in such a way that the opportunity cost is high. This could be done by international exports of goods that have abundant factors available in the boundary of the country and through import of goods that have scarcity of factors in the national boundaries. The production possibility frontier explains that the output of the country remains same for a certain level of technology and international trade takes place due to difference in outputs as a result of different levels of technology achieved by different countries. Heckscher-Ohlin - Heckscher Ohlin theory of international trade Capital and