Question

The assumption of identical tastes in the Heckscher-Ohlin (HO) model increases the likelihood that comparative advantage will be determined by international differences in factor endowments. True or false? Explain in detail

Answer 1

The given statement is TRUE

Reason: The HO model states that countries trade with each other based on their factor endowments. A capital abundant country will produce and export capital intensive goods, while a labor abundant country will produce and export labor intensive goods.

It assumes countries having similar production technologies, similar tastes or preferences and only two factors of production.

The assumption of identical tastes makes trade more dependent on factor endowments because here tastes play no role in consumer demand. It can be the case that capital rich countries have tastes where people prefer capital intensive goods more than labor intensive goods. This will make the countries not export capital intensive goods, which in turn affects pattern of international trade. This makes the trade dependent on factor endowments to determine comparative advantage