Bedano, Archie BSFS 3A International Economics

The Ricardian Model

- it is one of the simplest models to introduce the principle of comparative advantage but
offers the most compelling reasons supporting international trade. The Ricardian model
is one of the most understood and one of the most compelling of international trade. It
includes the five reason to trades simultaneously. It also incorporates differences in
technologies between countries, concludes that everyone benefits from trade.
Strength

- It engages trade in international trade even when the one country’s workers are more
efficient at producing every single good than workers in other countries. It demonstrates
that if two countries capable of producing two commodities engage in the free market,
the each country will increase its overall consumption by exporting the good, if there
exist differences in labor productivity between both countries.
Weaknesses

- The Ricardian model is based on the labour theory of value which itself is unrealistic. It
also wrongly assumes labour as a homogenous factor and is based on constant returns
to scale and thus constant costs of production in both the countries. The model also
ignores the transport cost differences and is a restrictive model that assumes free trade.

Immobile Factor model

- The immobile factor model highlights the effects of factor immobility between industries
within a country when a country moves to free trade. In the immobile factor model, we
assume that the cost of moving a factor is prohibitive. This implies, that labor, the only
factor, remains stuck in its original industry as the country moves from autarky to free
trade. The immobile factor model is a two-country, two-good, two-factor, perfectly
competitive general equilibrium model that is identical to the Ricardian Model except that
labor cannot move across industries.
Strength

- The model allows to assess the short-run impact of movements to free trade. There is a
fixed supply of workers and products. The mode represents an extreme short-run
scenario.
Weaknesses

- Are not highly costs effective that requires the use of highly sophisticated techniques
which in turn require expensive technology and therefore cannot be sued by smaller
companies or retail; investors who don’t possess the required resources.
Specific Factor Model
- The name of the model comes from the fact that one element of production is thought to
be "unique" to a certain industry. A particular factor is one that remains static within an
industry or between industries when market conditions change. For a variety of reasons,
a component may be stationary across industries. Some components may have been
particularly developed (in the case of capital) or trained (in the case of labor) for use in a
specific manufacturing process. In many circumstances, moving key elements between
industries may be impossible, or at least difficult and costly.
- The Specific factor model is intended to show the consequences of trade in an economy
where one factor of production is industry-specific. The most intriguing findings concern
changes in income distribution that might emerge from a country's transition to free
trade.
Strength

- Each sector has a specific factor that is confined to it, and each also employs labor,
which is perfectly mobile between them. Capital is specific to a particular industry. The
model is specific to a particular industry.
Weaknesses

- Lower revenues and higher would combine to reduce the return to capital. Capital in the
export industry will rise with the respect to purchase of both exports and imports.

Hekscher-Ohlin model
- In economics, a theory of comparative advantage in international trade according to
which countries with abundant capital and scarce labor will tend to export capital-
intensive products and import labor-intensive products, while countries with abundant
labor and scarce capital will tend to export labour-intensive products and import capital-
intensive products. Bertil Ohlin (1899–1979), a Swedish economist, developed the
hypothesis based on work by his master, Swedish economist Eli Filip Heckscher (1879–
1952). In 1977, Ohlin was awarded the Nobel Prize in Economics (the Sveriges
Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) for his work on the
theory.
Strength

- The absolute amount of capital is not important, rather is the amount of capital per
worker. The model is frequently at variance with the actual patterns of international
trade.
Weaknesses

- The model has a poor predictive power. It is hard to believe that the factor endowment
theory could offer an adequate explanation of international trade patterns. Hecksher-
Ohlin theory claims that the state of factor endowments of each country determines the
 production of each country but Bernstein and Weinstein found that the factor
endowments have little predictive power.

Simple Economies of Scale

- The notion of fully competitive marketplaces might be thrown out the window when it
comes to industrial scale. The assumption in most perfectly competitive models is that
production occurs with constant returns to scale (i.e., no economies). This indicates that
while the size of production grows, the unit cost of manufacturing remains constant.
When that assumption is challenged, it might lead to increased earnings and strategic
action among businesses. Because there are so many ways to think about strategic
interactions between organizations, there are so many different models and outcomes
that may be reached. A variety of models have been devised to circumvent some of
these issues by retaining some of the main properties of perfect competition while
allowing for economies of scale.
Strength

- Economies of scale are where the cost declines undergone by companies when it
increases the level of outcome. Reduction of the cost provides more possibilities for the
companies to reduce their price structure to gain more sales. This is the main advantage
of economies of scale. Economies of scale benefit to decrease the unit cost of
production. This will enable room for the senior management to increase the salary scale
of their staff, also train the staff more, and recruit more talents. All of these will help the
company to improve more and more. Shareholders will be more interested to invest in
the company more since they will feel confident due to the economies of scale that
achieved. It will reflect the stability of the company where the investors will notice the
investment as less risky comparatively.
Weaknesses

- The company processes start to become less efficient after a specific point in the output.
The company will experience an increase in average per-unit cost when they start to
produce an additional unit of output beyond a certain level. This is known as the
diseconomies of scale. This is the major drawback of economies of scale. Management
will feel it is difficult to control the business operation when the company grows. It will be
difficult to manage thousands of employees with heavy production output. This will
ultimately reduce the efficiency of company operations. When the company workforce is
very large, the communication can turn to be ineffective. This is a major factor to reduce
the effectiveness and efficiency of the employees. After the company reaches a specific
level of production output, the company processes start to become less efficient. This
will ultimately increase the unit cost and the company will have to increase the prices to
bear this cost. There will be an environmental impact on many large companies. When
the company grows, the damage to the environment will also increase.
Monopolistic Competition
- Monopolistic competition is a market system in which numerous enterprises compete in
the same industry, producing similar but distinct products. There is no monopoly among
the firms, and each one works independently of the others. A kind of imperfect
competition is the market structure.
- The characteristics includes: the presence of many companies. Each company produces
similar but differentiated products. Companies are not price takers. Free entry and exit in
the industry. Companies compete based on product quality, price, and how the product
is marketed.

Strength

- Companies in monopolistic competition produces differentiated products and compete

mainly on non-price competition. Production at the lowest possible cost is only
completed by companies in perfect competition. Monopolistic comes with a product
mark-up, as the price is always greater than the marginal cost.

Weaknesses

- Monopolistic competitive companies operate with excess capacity. They do not operate
at the minimum ATC in the long run. Production capacity is not full capacity, resulting in
idle resources. It also wastes resources on selling costs like advertising and marketing to
promote the products. But since companies do not operate at excess capacity, it leads to
unemployment and social despondency in society. The marginal cost is less than the
price in the long run. Monopolistic competitive market structures are also allocatively
inefficient. Their prices are higher than marginal cost.