The Heckscher-Ohlin Trade Theory

1 The Heckscher-Ohlin Trade Theory The Island that I selected, Green Island, had more labor than capital. I selected this Island because it would be easier to increase the welfare of the citizens by selecting to produce goods that require little capital and more labor. Since labor is more abundant in the country, it would be cheaper to produce these types of goods. The welfare of the citizens would improve because they would earn more wages, but the income of the capital owners would decrease because less capital would be required for production. However, the overall welfare of the country would still improve since the gains of the workers would be more than the losses of the capital owners.

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2 My selected trading partner had more capital than labor. I selected this country because they would specialize in the production of goods that required more capital and less labor. For this reason, they would be the most appropriate trading partner because they would quickly trade their capital-intensive goods for our labor-intensive goods.

In the beginning, the welfare of my country increased. I managed to trade many of the jeans that Green Island produced, which were produced with minimal capital and more labor, for less of their cell phones. However, over the long run, the welfare of the country decreased. This decrease was attributed to the fact that once the trade is allowed, the profit-seeking firms in both countries will move their products towards the country that has a temporary higher price for their goods. Therefore, the jeans that were produced in Green Island would have fetched a higher price in the trading partner country that had more capital-intensive goods. Therefore, instead of decreasing the number of jeans exported as I did, I should have increased them gradually because trade would have allowed Green Island to sell them at a higher price in the other country.