Free International Trade Patterns Essay Sample
The Heckscher-Ohlin theory focuses on international trade commodities, which are essentially determined by three key factors: capital, land, and labor. In essence, the exchange of commodities internationally according to the Heckscher-Ohlin is an indirect arbitrage factor that prescribes the transfer of services, which are ordinarily immobile determinants of production potential from abundant locations to points of scarcity. Ricardian theory establishes the pattern of international trade according to elements of labor depending on the occurring comparative advantages occurring between participant countries in the international trade activity. In essence, the Ricardian theory explains that beneficial trade occurs when there are significant variations in the marginal opportunity costs between countries, which increase the chances and potential of trade.
The Heckscher-Ohlin theory demonstrates how trade affects the distribution of income within trading partners. In practice, there are significant differences in the trade patterns observed between open and closed economies. For instance, the HO model of a small open economy indicates that there is potential decline in marginal productivity level is essentially offset by a shift in the product-mix in the direction of capital intensive products. On the contrary, in the scenario of a closed economy, the shift in the product mix is restricted by the fact that everything needs to be sold internally. Thus, the occurrence of trade between open economy partners presents better sustainability compared with the occurrence of trade between open and closed economy partners. Even in among open economy partners there exists a significant variation in the magnitude of the open economies. As a result, trading between a small open economy and a large open economy presents advantages to one partner than the other.
Leontief paradox challenges the applicability of the factor-endowment model on account of its profound level of simplicity, consequently making it unrealistic in the projection of economic trends. In order to prove this factor, Leontief subjected the factor-endowment model to analysis of the foreign trade of the United States which by virtue of its capital abundance should ordinarily be importing labor-intensive goods, while exporting capital-intensive goods. However, the results from Leontief's experiment came out negative, and similar outcomes were observed from other renowned economists.
In practice there exist different trade patterns for manufacturers and primary/agricultural goods. This is fundamentally because of differences in terms of factor endowments, which serve as a major basis of trade in resource intensive goods and primary goods. As a result, there exist significant price variations between primary goods and manufactured goods. Hence, the primary determinant for export of the manufactured goods will be the per capita income, which leads to the export of manufactured goods to developed countries of relatively high per capita income. On the other hand, the primary goods are less resource intensive and mostly consumed within the producing country, which limits its export to developed countries having high per capita income.
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In response to your questions, an ad valorem tariff is commonly applied in the trade of manufactured goods. It is essentially expressed as a fixed percentage of the total value of the imported product. An ad valorem tariff is capable of differentiating the final products produced in terms of quality. Another advantage is that it maintains a constant level of protection for domestic producers during seasons when prices are changing. Ad valorem leads to the occurrence of significant administrative complexities during determination of duties. On the other hand a compound tariff is expressed as a combination of ad valorem and specific tariffs. This arises from manufactured products that entail the use of raw materials, which are ordinarily taxed. This essentially leads to a neutralization effect on the cost disadvantages accrued by some domestic manufacturers arising from the aspect of tariff protection, while it significantly raises the final price of the product in its offshore market.