Models of International Trade

International trade is a branch of economics, which, together with international finance, forms the larger branch of international economics. Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs. Some of these models have been in existence for many years.

The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. The following features of this model should be noted. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view its aim is to provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.

The theory predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance.