Trade Among Similar Countries: Implications of Decreasing Costs and Imperfect Competition

The Ricardian and Heckscher-Ohlin theories of international trade imply that trade occurs between countries with dissimilar technologies (Ricardo) or factor endowments (Heckscher-Ohlin). The Heckscher-Ohlin theory discussed in Chapter 3 suggests that mutually beneficial trade occurs between nations with differing factor endowments. Assuming wheat production is relatively land-intensive and cloth production is relatively labor-intensive, a land-abundant country exports wheat and imports cloth while the labor-abundant nation exports cloth and imports wheat. While some trade patterns adhere to this theory, others do not.