Question

Both Bertil Ohlin (1977) and Paul Krugman(2008) won the Nobel Prize in Economics for their pathbreaking contribution to the theory of international trade. Please compare their analysis of trade patterns.( (Hint: What’s the difference between the H-O model and the trade based on economies of scale?)

Answer 1

As per H-O (Heckscher Ohlin) model, a country should get into international trade with other countries and start exporting the materials produced in their country for which they have excess. Surplus materials need to be exported to the foreign nations. This is beneficial as the exporting country would get rid of the excessive inventory of any materials produced.

Economies of scale refers to reduction in average cost due to large scale production.. As per trade based on economies of scale, a country should produce upto its maximum capacity so as to reduce the average cost of production and to achieve economies of scale. The excessive material thus produced due to achieving of economies of scale should be exported to the foreign nation.

Thus as both the theories support exporting of the surplus production materials in a country, H-O model states to export the excessive material produced whereas economies of scale supports that the country should produce more so as to reduce its average cost of production and whatever is produced excessively should be exported. As per H-O model, countries unknowingly get into excessive production whereas in economies of scale, the countries knowingly produce in excessive quantities.