International Business Economics Essay Example | Topics and Well Written Essays - 1500 words

International Business Economics - Essay Example The figures show labour cost in hours for producing one unit of good David Ricardo formulated the theory of comparative advantage and argued that even if a one country is more productive in both lines of production it would be still profitable to trade. Country A is more productive in both lines of production but it will still be profitable to trade with country B, this is shown by first stating that country A is more advantaged in production of good X, therefore when wee calculate the comparative advantage country A will specialise in the production of good X and country B will produce good Y and they will gain by trading. (Hardwick, 1997) The Hecksher-ohlin trade model states that trade is based on the difference in factor endowment, a labour rich country will produce and export labour intensive good, and it will also import capital intensive goods. A capital rich country will produce and export capital intensive goods; it will also import labour intensive goods. According to the factor equalization theory, if we have a situation where factors of production cannot move from one country to another but there is free movement of goods, then the free movement of goods will eventually equalize factor prices. Point Q is the equilibrium point of producing both goods for country one, point P is the point of equilibrium for country two in producing both goods. The movement of goods will cause a shift in equilibrium points and case price equalization. Equilibrium shift as shown by the arrow. According to the Rybczynski theory an increase in factor of production and the other factor remains constant in a country , then the output of the good using the factor of production intensively increase while the output of the other good will decrease in absolute amount provided factor and output prices remain constant. (Jagdish, 1987) The countries original equilibrium is at point P, after increase in labour the new equilibrium is at point P'. According to the Stolper Samuelson theory, he argues that a tariff imposed on import goods causes an income distribution. He argues that a tariff on an import causes domestic prices to rise; this causes an increase in domestic production as firms emerge to capture the profits caused by the price in this goods. This effect is