COMPARATIVE

HECKSCHER-OHLIN
ADVANTAGE THEORY VS. THEORY

Group 2 24/3/2023
DISTINCTION BETWEEN THE
TWO THEORY
COMPARATIVE
ADVANTAGE THEORY
MODEL

Nation gains maximum benefit by specialize

in producing goods that they have a
comparative advantage in
 Question

Why do vietnam exports both

footwear and automobile?
COMPARATIVE ADVANTAGE EXAMPLE OF PPF CURVE
THEORY MODEL
COMPARATIVE ADVANTAGE HECKSCHER-OHLIN MODEL
THEORY MODEL
HECKSCHER-OHLIN
MODEL

Basic situation:
Two identical countries (A and B) have
different initial factor endowments.
Autarky equilibrium ( , ): no trade,
individual production equals consumption.
Trade equilibrium: both countries consume
the same ( = ), especially beyond their
own Production–possibility frontier
 Comparative Advantage H-O model

Basis of Assume Opportunity cost is fixed Use the law of Increasing opportunity cost
trade Based on differences in opportunity costs Based on differences in factor endowments

Assumptio Takes labor as the only factor of production Assumes that there are two factors of
ns (labor theory of value) production: labor and capital.

Pattern of Specialize in producing goods that one nation Export goods that make intensive use of factors
trade has a lower opportunity cost that one nation has in abundance

Come from the ability of countries to trade

Come from the ability of countries to specialize
Gains from in producing goods in which they have a
trade comparative advantage
Benefits consumers in all countries
goods that use different factors of production.
The owners of the abundant factor of
production in a country benefit from trade,
while the owners of the scarce factor of
production lose out.

Countries should specialize in producing goods Countries should diversify their production to
Suggestion
that they have a comparative advantage in make use of their factor endowments
ILLUSTRATION OF BOTH THEORY
ON VIETNAM CASE
COMPARATIVE ADVANTAGE
INTRODUCTION TO THE RCA

Identify the sectors in which an economy has a

comparative advantage

Introduced by Béla Balassa (1965)

It is based on the Ricardian comparative advantage

concept.
The formula is defined as a commodity's
share in total national exports divided
by its share in total world export

RCA > 1: a particular commodity has

comparative advantage in exports.

RCA < 1: the country have a comparative

disadvantage in the commodity or
industry.
The comparative advantage theory has explained why the EVFTA
Agreement certain types of goods that Vietnam imports and exports
certain types of goods.

Vietnam 2019 EU 2019

Code Product name RCA Code Product name RCA

Automobile
851 Footwear 10,4 714 54,7
spare parts

Vietnam should export footwear to the European Union and import

automobile spare parts from the European Union.
Since the EVFTA Agreement has
enabled

The EU committed to eliminating 100%

tariffs on Vietnamese footwear
products, with the longest period of 7
years.
Footwear exports to the EU increased by
19.2% over the same period in 2020.
For automobile spare parts, In
September 2021, the number of
imported parts from the EU market
reached US$23.34 million, up 23.59%
over the previous month and 462.36%
over the same period in 2020
 ADVANTAGES
Reveals the real comparative
advantages that a country possesses
Understand a country’s degree and
kind of specialization in the production
of specific goods and services”
DISADVANTAGES
The formulas take into account only
the volume of export of an economy’s
commodity in relation to the total
world exports of that commodity.
RCA index is unstandardized
HESKCHER - OHLIN THEORY

A country will export goods that require resources in

abundant supply within the country and import
goods that require scarce resources.

According to the theory, Vietnam should specialize in

producing goods that are labor-intensive

Vietnam needs to import certain goods that require

natural resources and capital equipment
 VIETNAM EU
(in VND) (in thousand EUR)

AUTOMO AUTOMOT
FOOTWE
TIVE IVE
AR
PARTS FOOTWEAR PARTS
(Thuong
(Truong (Tod's Group) (ZF
Dinh
Hai Friedrichs
Footwear)
Group) hafen AG)

Capital
56,255,696 5,833,792,
Expenditure 85,236 7,669,000
,847 646
(K)

Labor Cost 30,071,762 878,507,2

107,024 4,783,000
(L) ,572 41

Capital -
Labor ratio 1.871 6.641 0.796 1.603
(K/L)
 Vietnam 2020 EU 2020
(in USD) (in USD)

VIETNAM SHOULD CONCENTRATE ON

PRODUCING LABOR-INTENSIVE Total Capital
110.912 billion 3.3814 Trillion
COMMODITIES ACCORDING TO H-O (TK)
THEORY

Summary: The difference in the supply of factors of 54,751,934 215,817,128

production is the determining factor in the Total Labor (TL)
people people
difference in the prices of final goods, which
motivates countries like Vietnam to conduct
international trade
TK/TL 2025.718 15667.895
 THE SUPERIORITY OF
HECKSCHER-OHLIN THEORY
Heckscher-Ohlin's Offering for difference in comparative costs of

superiority commodities between trading countries.

Making a positive contribution to economics:
concentrates on the bases of trade instead of
trying to demonstrade the gains from
international trade.
Providing a satisfactory picture of the future of
foreign trade
Successfully explains that differences in the
availability of resources in different countries
determine the prices of products that each
country specializes in producing.
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