Page 23 - FINAL CFA I SLIDES JUNE 2019 DAY 6

Session Unit 5:
19. Int. Trade & capital Flows, p136

LOS 19.d: Compare the Ricardian and Heckscher–Ohlin models of trade and the source(s) of

comparative advantage in each model, p.140

The Ricardian model of trade – only one factor of production—labor. Differences in production costs
stem from differences in labor productivity arising from differences in technology.

Heckscher and Ohlin model of trade: Differences in production costs stem from differences in the
relative amounts of 2 factors (capital and labour) the countries possess.

• England will specialize in capital-intensive cloth and
Assume Capital intensive Labour intensive import wine; and
• Portugal will specialise in labour-intensive wine

and import cloth.

• In England, demand for capital (and price)

will rise -and hence price of cloth will rise
whilst price of wine (import) will fall;

• In Portugal, demand for labour (and price)
England has more capital compared to labour than Portugal
will rise -and hence price of wine will rise

whilst price of cloth (import) will fall;