The Heckscher-Ohlin (H-O) model is a general equilibrium model that shows the impact of different ownership of resources by countries on the trade (Feenstra & Taylor, 2011). This model shows a long-run effect as all factors of productions can move freely. Various assumptions are made in this model, including:
1. Free trade
2. Identical technology level of trading partners,
3. Identical and homothetic preferences
4. Ability of factors to move freely between industry
The H-O theorem states that a country will export the good that uses intensively the factor of production it has in abundance, and will import the other good. This report will first review the imports and exports pattern between two selected countries-Australia and Indonesia. Next, analysis on the resources endowments of the two countries will be compared with the trade patterns. Based on our findings, conclusions will be made as to whether the H-O Theorem stands up to its main predictions. Lastly, any major differences in trade patterns will be discussed theoretically.
Current Prediction
As shown in Table 2 (see appendix), Australia’s capital to labour ratio is more than 10 times higher than Indonesia’s. Based on H-O model, we would expect to see Australia exporting more capital-intensive goods than Indonesia. Furthermore, developing country like Indonesia is often associated with having a large pool of cheap labour, compared to developed nation like Australia. Trade pattern will not only be examined by using capital and labour as factor of productions only. Resources abundance and environment play a part too.
Analysing Trade Pattern
Table 1 (see appendix) shows the 10 main principal imports and exports of Australia with Indonesia for the year 201...
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...n is insufficient.
Conclusion
Firstly, we have to acknowledge that any conclusions reached are based on many assumptions and an understanding of the inherent mistake of the data.
Overall, we can say that Australia is more capital abundant than Indonesia. Australia’s exports are mainly on capital-intensive agriculture goods. As a developing country with abundant and relatively skilled labour, Indonesia’s could manage to exports both capital and labour abundant goods. We also observe the incidence of intra-industry trade in some mining goods like crude petroleum.
Unexplained trade pattern that is not consistent with H-O Theorem was observed and more information regarding both countries functioning is needed. However, we can conclude that H-O Theorem is accurate and countries are exporting goods that use the factor of productions they are abundant in.
After Sir John McEwen, the former Minister for Trade, signed the Australia-Japan Commerce Agreement in 1957, the trading aspect between the two nations has developed ...
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Sisouphanthong, B., & Myers, C. N. (2006). Retrieved Octobe r26 2011, from INTERNATIONAL TRADE: http://www.undplao.org/whatwedo/bgresource/humandev/UNDP-NHDR06c.pdf
Another form of regulation of trade is the imposition of policies which do not favor exports such as introduction of quotas and requirements of licensing. The volume of trade of the primary goods is limited by the quotas and this has a negative effect on the gross domestic product. In the long run, the economic growth of the developed countries is slowed by lack of income (Das, 2004).
...stinguish that a qualitatively new type of worldwide trade was developing. The illustration in United stated since the late of 1980 showed that “has less productive portions moved offshore which lead to a decrease in employment while maintaining higher value-added parts. Consequently, all the productivity has risen, while the tradable sector has increased employment” (Spence and Hlatshwayo,2011).