Storyline of H-O Model
If labour endowment is more
Labour abundant country
Labour is easily available
Price of wages is lower (cheap labour and abundant labour)
Labour cost/ Production cost is lower
Country use more labour intensive production technique
Country will export those goods which are produced by labour intensive technique
• Similarly, a capital endowed country will export goods that uses capital intensive production techniques
• Thus, it is basically due to endowment of factors, which reduces the cost of production if the abundant factor is intensively utilized. This enables the country to produce the goods at a much cheaper cost and hence comparative advantage.
Here N – 1 is labour abundant and produces X,Which is labour intensive commodity. Here, N – 2 is K – abundant and produces Y, which is capital intensive commodity. Slop PA is lower than slope of PA’. Implies that N- 1 has comparative advantage in x. Slope of PA’ is higher than slope of PA. Implies that N-2 has comparative advantage in Y.
Here N-1 is L –abundant and produces X.Which is a labour intensive commodity. Here, N-2 is K – abundant and produces Y,Which is a K – intensive Commodity
Here, N-1 is L – abundant and produces X,Which is a labour intensive commodity. Here, N-2 is K abundant and produces Y. Which is a K-intensive commodity
BEFORE TRADE N-1 is at point A with (w/r) 1 and (Px/Py) = PA. N-2 is at point A’ with (w/r)2 & (Px/Py) = PA’. AFTER TRADE They reaches Point B v
Factor Price Equalisation Theorem (HOS Theory)
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