GSM Lecture 2

Management > Global Strategic Management > Comparative advantage

Comparative advantage

Countries export goods in which they possess a comparative advantage, and import goods in which they have a comparative disadvantage.

Heckscher-Ohlin

The Heckscher-Ohlin model states that countries have a comparative advantage in goods for which the resources are abundantly available. For example, capital rich countries will have a comparative advantage in capital-intensive goods, while labour-abundant countries will hold a comparative advantage in labour-intensive goods.

However, these theories fit imperfectly in the real world. The Leontif paradox (1953) states that the US is regarded as a capital abundant country, but exports labour-intensive goods, while other labour-intensive countries export capital-intensive goods.

This relates to the LAs and OAs of different countries (See Understanding the Global Firm, lectures 3 and 6)

Limitations

There are limitations in the H-O model:

It makes it difficult to extend beyond two countries.
Comparative advantage becomes difficult to assess when analysing multiple countries
Study of intra-industry trade is difficult
There can be no two-way trade in the same good.
It does not explain firms' actions
It seems to only consider countries that both import and export.