When is the Heckscher-Ohlin theory preferred over Ricardo theory by economists? When does the converse hold?

Answer 1

It is not One vs. the other. Heckscher-Ohlin-Samuelson (HOS). Is a particular model as to why one country would have a comparative advantage in one product and the other country would have the advantage in the other. In its simplest form, the Ricardian model looks at labor as the only factor of production and MPL is constant so both countries have LINEAR Production Possibilities Frontiers(PPF) and maximum gains come from complete specialization.

We like to think of PPF's being concave or bowed out.

The HOS model recognizes thwere can be Ricardian comparative advantage when there different shaped PPF's. The HOS Model explores one way the PPF's could be different. . By holding production technologies constant, and Identical demands (preferences. If countries differ in their RELATIVE endowments of capital and labor, Countries which are "rich" in capital relative to labor will have a comparative advantage in producing goods which use their relatively abundant factor most intensively.

There are some key take aways.

Without trade,

Countries which are labor abundant will produce and consume more of the products which are labor intensive.

Countries which are Capital rich will produce more of the goods which are capital intensive.

Wages in the Labor rich countries will be lower than wages in the capital rich country (why,? because labor is relatively more scarce).

With Trade, labor rich countries will specialize even further in labor intensive products and export for more of the capital intensive good.

This will drive up wages in the Labor rich country (wages in the capital rich country will fall) The return to capital will fall in the labor rich country ( and will rise in the capital rich country).

It is assumed that capital and labor are immobile. Both factors were perfectly mobile we would expect capital to migrate from capital rich countries to labor rich countries with labor migrating in the opposite direction. Migrate would cease when the returns to capital and labor are equal in both countries. By trading in the final products we get the exact same result. That is, the free trade in final goods is a perfect substitute for perfect factor mobility.

There are also quite a few other things wee can glean from this model but I won't get into.

In the simplest Ricardian models there is no mention of demand. In HOS they hold demand constant and identical and explain trade flows from different shaped PPF's. There can be gain's from trade if PPF's are the same shape but demands are different.

Suppose we have two countries, Australia and India. Both are equally good at producing Beef and Lamb. The Aussies love their beef and few Indians eat it. If they both produced an even mix of both and traded what they hated for what they loved they would both benefit greatly.

If you have any questions at all about international economics I would be more than happy to help