Ph.

D Ho Nhut Quang 1
 1. MERCANTILISM
 2. THEORY OF ABSOLUTE ADVANTAGE
 3. THEORY OF COMPARATIVE ADVANTAGE
 4. HECKSCHER-OHLIN THEORY
 5. STOLPER –SAMUELSON THEOREM
 6. RYBCZYNSKI THEOREM
 7. IMMIZERIZING GROWTH
 8. PRODUCT LIFE CYCLE THEORY

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 17-18th centuries
 The way for a nation to become rich and powerful is to
export more than it imports
 The more gold and silver a nation had the richer and
more powerful it was.
 By encouraging exports and restricting imports, the
government would stimulate economic growth and
employment.

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 It realized the importance of international
trade in a country’s economic development .
 However, conflict happens if all countries
promoted exports and restricted imports 
(where to export if all countries restricted
imports?)
 Beggarthy- Neighbor way of development.
(win-loss inter-trade)

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 Developed by Adam Smith
 A country can benefit from international trade when it
specializing producing and exporting the product it has
absolute advantage.
 It can explain the international trade between
developed and developing countries.
 What happens if a country didn’t have absolute
advantages on any products?
 It could not explain the trade among developed
countries.

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 David Ricardo (also called Ricardian Model)
 A country can benefit from international trade if it
specializes in producing and exporting the products it
has comparative advantage.
 In other words, a country can benefit from trade if it
specializes in producing and exporting the products it
has lowest opportunity costs.
 Trade is based on differences in labor productivity
among countries.

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 It could explain the pattern of trade among
developed countries.
 It confirmed that a country could benefit from
trade even if it had no absolute advantage on any
goods.
 However, it just assumed that there are
differences in labor productivity among countries
as a base for international trade but it did not
explain why they were different.
 It didn’t mention the effect of international trade
on the earnings of factor of production (labor)

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 A labor-abundant country can benefit from
trade if it specializes in producing and
exporting the labor –intensive products
 A capital- abundant country can benefit from
trade if it specializes in producing and
exporting capital-intensive products
 International trade will make labor wage (w)
the same in the two nations; similarly, it will
cause the price of capital (r) to be the same in
both nations (The relative and absolute
factor-price equalization theorem)

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 When taking the empirical tests on the H-O
theory, Leontief found that the United States,
which was a capital-abundant country, has
produced and exported large amount of
labor-intensive products and imported
capital-intensive products. So, he insisted
that the H-O theory had problem.

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 The year in which Leontief used data for the test
was 1947 which was closed to the Second World
War. So the data collected were not reliable.
 The labor-intensive industries were highly
protected by the US government at that time. It
restricted the imports of labor-intensive
products.
 Leontief mainly mentioned physical capital
(machines, factories, etc.) and ignored the human
capital. Adding human capital to physical capital
would make US export more capital intensive
products.

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 The H-O is useful in explaining the pattern of
trade between the developing countries
(labor-abundant) and developed countries
(capital abundant).
 International trade increases labor income
among countries.
 The H-O theory could not explain why the
Unites States produces and export cars and,
at the same time, imports cars from other
countries (Intra-Industry Trade).

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 Intra-Industry Trade: A country can benefit
from trade if it produces the goods whose
production is based on economies of scale or
product differentiation.

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 Due to technological gaps among countries,
an innovating nation can benefit from trade if
it exports new developed products to other
countries.

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 As the relative price of a labor-intensive
product increases, the real labor wage of the
labor-intensive industry will increase and the
real labor wage of capital-intensive industry
will reduce (Figure 4-7).
 Ex: the relative price of Cloth (labor-intensive
product) increases, the real labor wage in the
Cloth industry will increase and the real labor
wage in the Food industry will reduce.

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 At constant relative prices, an increase in the
labor source in a country will lead the
increase in the production of the labor-
intensive product and reduction in the
production of capital intensive product
(Figure 4-9).
 EX: an increase in the labor source will lead to
the increase in the production of Cloth
(labor-intensive) and reduction of production
of Food (capital intensive)

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 Terms of Trade : is the ratio between the
export price index and the import price index
 Terms of Trade = P(export)/P(import)
 Terms of Trade are rather low in developing
countries.
 If a home country exports Cloth and the
Foreign country exports Food , then Pc/PF
represents the term of trade of the Home
country. And PF/Pc is the term of trade of the
Foreign country.

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 Economic growth may lead to two effects:
◦ The welfare effect: economic growth increases the
country’s welfare : GDP per capita increases
◦ The Term-of-Trade effect: economic growth
deteriorates the country’s Term of Trade, which
leads to the reduction in the country’s welfare
because it reduces the volume of its international
trade.
◦ If the Term-of-Trade effect is larger than the
welfare effect  economic growth but welfare
reduces. This is called Immiserizing Growth.

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