International Trade Theories

Sample Solution

        Comparative advantage, a cornerstone of international trade theory, posits that countries should specialize in producing goods and services in which they have a relative cost advantage. The Heckscher-Ohlin (H-O) model provides a framework for understanding the determinants of comparative advantage based on a country's endowment of factors of production.

Full Answer Section

        Factor-Price Structures and the H-O Model The H-O model asserts that a country's comparative advantage is determined by its relative abundance of factors of production: labor, capital, and land. Countries tend to export goods that are intensive in their relatively abundant factor and import goods that are intensive in their relatively scarce factor. This leads to a tendency for factor prices to equalize across countries engaged in free trade. For example, a country with a relatively abundant labor force may have a comparative advantage in labor-intensive goods like textiles or electronics. Conversely, a country with a relatively abundant capital stock may have a comparative advantage in capital-intensive goods like machinery or automobiles. Challenges for Developing and Developed Nations Both developing and developed nations face challenges in achieving and maintaining comparative advantage. However, the specific challenges they encounter differ:

• Developing Nations:
  • Infrastructure: Inadequate infrastructure, such as transportation and energy networks, can hinder a country's ability to exploit its comparative advantage.
  • Education and Skills: A lack of skilled labor can limit a country's competitiveness in certain industries.
  • Institutional Barriers: Corruption, bureaucratic red tape, and unstable political environments can create obstacles for businesses.
• Developed Nations:
  • Rising Labor Costs: As a country develops, its labor costs may rise, eroding its comparative advantage in labor-intensive industries.
  • Technological Change: Rapid technological advancements can disrupt existing comparative advantages and create new opportunities for other countries.
  • Globalization and Competition: Increased competition from other countries, particularly emerging markets, can make it challenging to maintain a dominant position in certain industries.

Saudi Arabia's Comparative Advantage Post-Vision 2030 The Saudi Vision 2030 aims to diversify the Saudi economy away from its reliance on oil. While oil will likely remain a significant source of revenue, the Vision seeks to develop new sectors and industries. According to the H-O model, Saudi Arabia may have a comparative advantage in the following commodities:

• Petrochemicals: Given its abundant oil reserves, Saudi Arabia has a natural advantage in the petrochemical industry.
• Renewable Energy: With its vast solar and wind resources, Saudi Arabia could develop a comparative advantage in renewable energy production and export.
• Mining: Saudi Arabia possesses significant mineral resources, such as phosphates and gold, which could be exploited to generate export revenues.
• Tourism: The Saudi government is investing heavily in tourism development, aiming to attract visitors from around the world. This could create a comparative advantage in the tourism sector.

However, achieving a sustainable comparative advantage in these sectors will require significant investments in infrastructure, education, and technology. Additionally, Saudi Arabia will need to address challenges such as competition from other countries and the potential for fluctuations in global commodity prices.