Question

Explain the differences between the Ricardo cost-based theory of international trade, and the Hecksher-Ohlin resourse-based theory of international trade.

Answer 1

Difference:

1. Ricardian theory is based on two countries, two commodities and one factor while Hecksher - Ohlin's Modern theory incorporates two countries two commodities and two factors.

2. According to the Ricardo cost based theory, the principle of comparative costs is a special feature of international trade.

While according to Hecksher-Ohlin resource based theory, the principle of comparative cost is applicable to all trade; whether internal or international.

3.  In Hecksher - Ohlin theory, the cost differences is calculated in terms of money while Ricardo cost based theory explains the difference in terms of labour theory of value of which is full of defects and impracticable. Trade which involves exchange of goods and services has been carried in terms of money. H.O. theory renders the cause of the trade easy to understand.