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Subject 2 Does the Leontief paradox invalidate the Heckscher-Ohlin model of tradeWhy and how countries trade has always been a difficult and capital question for economists The Ricardian model explained trade patterns through differences in labour productivity however international trade can only partially be explained this way It has also been wildly believed that resource allocation also plays a vital role in how nations trade Heckscher-Ohlin H-O two Swedish economists were the first to integrate resource allocation in an economic model of trade now referred to as the Heckscher-Ohlin model of trade This theory was generally accepted when it was published However Leontief published empirical data about USAtrading 1953 that was largely inconsistent with the H-O theory of trade Since then data about what countries trade has been so inconsistent and confusing that there is no real empirical data supporting the H-O model of trade Thus there are flaws in the original H-O theory the questions now are why isnt there any empirical data and under what conditions is it possible to make the model consistent with realityThe H-O theory is also called the factor proportion theory this is because it stresses the importance of the allocation of different factors of production and what proportion they play in what countries trade This model is capable of explaining the different input combinations producers may face which is the optimal one and thus the comparative advantage the nation thus possessesThe simplest way to explain this model is by explaining how it works in a two-factor economy two kind of industries with two kinds of inputs and what happens when this economy opens to trade with a twin nationThus we have a nation who produces two goods ie cloth and food and these goods necessitate two factors of production ie land and labour of course this is set under the conditions of pure and perfect competition thus both factors are mobile This model explains how the variations
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