Ricardian Theory

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International Economics and Finance Assignment 1

1) Ricardian theory is the basic model that assumes that there are only two countries, producing two goods, and using one input specifically in labor (Gerber 2011). However, several economists developed a more detailed theory in the twentieth century stating that the nations are endowed with different levels of each input called factors. This theory is called the factor endowment theory or Heckscher-Ohlin (HO) theory. There are differences between these two theories in explaining international trade patterns.

First of all, the Ricardian model is much simpler compared to the factor endowment theory. In the Ricardian theory, each country is faced with a constant set of trade-offs and
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Lastly, due to the fact that the factor endowment theory states that a country has multiple factors of production, the assumption of a production possibility curve (PPC) with a constant cost like in the Ricardian theory cannot be applied any longer. This means that the economy have an increasing costs. In Conclusion, these two theories differ from each other and therefore have their own advantages and disadvantages.

2 A) According to Australia’s trade with East Asia (2010), the information stated that the major exports to Malaysia is crude petroleum, copper coal and aluminum. Crude petroleum has the highest exports, which is A$495 million. Copper exports A$467 million, while coal exports A$260, lastly aluminium exports A$226 million. Australia’s trade with East Asia (2010) stated that the major imports from Malaysia is crude petroleum, monitors, projectors and TV’s, computers and telecom equipment and parts. Crude petroleum has the highest imports, which is A$3,7,31 million. Monitors, projectors and TV’s import are A$893 million while computers import is A$839. Lastly telecom equipment and parts import is A$271 million. The cost of imports and exports stated in Australia’s trade with East Asia (2010), includes A$379 million of confidential items such as sugar and also tax or tariff
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