The which is based on factors of production

The Heckscher-Ohlin Theory

The
Heckscher-Ohlin theory refers to the economic theory represented by Eli
Heckscher and Bertil Ohlin. This theory mainly discusses about the
international trade at the maximum point of each country (ECONOMYWATCH,
2010). To start with, this theory claims that an individual country should only
export the goods of which they are capable of producing with the efficiency or
which has the plentifully abundant resources whereas that same country should
avoid producing the goods of which they are lack of plentifully abundant
resource. The theory depicts the model enabling the calculation of trade particularly
the equilibrium point of goods exchange between two countries that have
different specialized goods of their own production (Orourke, K., 2003).

Hence,
it can be said that the key focus of this theory is the exportation of goods which
is based on factors of production of the country to be full of availability and
the importation of goods of the country when the country cannot obtain the
availability of maximum production.

Regarding
the theory, the assumption of Heckscher–Ohlin model explains the two trading
countries are similar to each other excluding “endowment of factor of
production”. This assumes the aggregate preferences of both are homogeneous
meanwhile the relative abundance in capital results in the lower capital abundance
of the country in production of the capital-intensive product relatively
compared to the labor abundance of that country (Orourke, K., 2003).

Theory
assumes there is no trade between two trading countries at the first place. The
price of the capital-intensive product in the country which has full
availability of capital is lowered compared with the price of the production of
other countries (Orourke, K., 2003). On the other hand, the price of the
labor-intensive product in the country which has full availability of labor is
lowered compared with the price of the production of other countries.

When
the two countries of different endowment of factor of production starts the
trade, the enterprises will shift their products to the countries that gain temporary
greater price. By this, it results in the exportation of the
capital-intensive product by country which has full availability of capital.
Inversely, there will be the exportation of the labor-intensive product by country
which has full availability of labor.

For
instance, if Germany is the country with abundance of capital and land however
lack of available labor as the comparative advantage in products which count on
availability of capital and land, only small labor force e.g. barley. The
prices of barley will be lowered due to abundance of capital and land. This is
because both capital and land are viewed as key factors for the production of barley,
the price of barley hence is cheaper than countries lack of capital and land to
grow barley. The opportunity cost of expanding production of Barley of Germany
will be cheaper than Thailand’s. And this will also benefit the local
consumption and boost the export of barley. However, Germany will better import
the labor-intensive product since it seems too costly to due to lack of labor.
This will entail in the balance between importing and exporting as well.

 

Stolper–Samuelson Theory

The
Stolper–Samuelson theory by Wolfgang Stolper and Paul A. Samuelson is
internationally economic theory deriving basic concept from Heckscher–Ohlin
theory. The theory mainly discusses the association of the relative prices of
output and relative factor rewards particularly the wages as well as returns to
capital.

The
theory comes up with economic assumptions relating the returns to scale,
perfect competition as well as the number of factors to equalize the unit of
products. Theory claims that with an increase of the relative price of a
product will result in an increase of the returns to the factor, of which is
most intensively employed within the production (McCulloch, R., 2005).
However, this also creates the decrease in the return of the other relevant
factors.

As
a matter of fact, the theory assumes there is one sector generating exported
products whereas other sectors are about to contend against imported products.
The assumption also depicts that the sector that contends against the imports
is assumed to be labor-intensive which means that there is the higher ratio of
labor to capital compared with the export sector. By this, it boosts the
expansion of import-contending sector through the raise of relative price of
the output (McCulloch, R., 2005).

Moreover,
the economy is assumed to be at or close to full-employment point of both
factors. The combination of expansion of the labor-intensive sector and the
shrink of the capital-intensive sector will lead to the increasing demand for
labor depending on capital as well as the more pressure for the higher wage.

 Following to this, the higher wage can cause
zero profit (Feenstra, Robert C., 2004), the decrease in return to
capital as the price of exports remains the same. Therefore, this theory claims
the wage will raise up more than the price of imported products. Hence, when
the product to contend against imports is relatively labor-intensive, labor
forces consequently gains meanwhile capital owners will lose regardless of
which bundle of goods is consumed.       

Based
on above graph, this theory claims the increase of price of labor-intensive product
leads to the rise of payment to the factor used labor-intensive production and
a decrease in the payment to the capital-intensive production.

In
case the shares of capital and labor in the costs of production of a unit of
television are specified as ratio; 6/10 (capital) and 4/10 (labor), and the shares
in production of a unit of box are as ratio; 3/10 (capital) and 7/10 (labor).
Television then is the product employing a labor-intensive technique for
production, resulting in the rising price of television by 1%, but the wage
rate rises by about 2.3%. Hence, the rate of return to capital decreases by 1%.
On the other hand, if the price of one box rise up by 1%, the wage rate of
workers will decrease by 1.3 % consequently, the rate of return to rises by 2%.
Regarding the theory, both labors or capital-owners only benefit in case the
price of the product employing a factor intensive technique goes up due intervention
by the state.