Production of goods in different countries
Theory is also known as the factor-proportions theory as it emphasizes the interactions between different factors of production used in the production of goods in different countries. This model tries to explain that countries generally export goods that they can plentifully and efficiently produce (Krugman, Melitz, and Obstfeld 2018). Using a 2x2x2 model, the theory evaluates trade and the overall equilibrium between two nations with a varying capacity in their natural resources. It, therefore, takes the stand that a country ought to import the resources they have in excess while importing the ones they need as pointed out by Iwasa and Nishimura (2014).
On the other hand, the Ricardian model bases its argument on labor as being the only factor in production. According to David Ricardo, international trade produces an increase in the world output; due to each country specializing in the production of goods, it has a comparative advantage (Krugman, Melitz and Obstfeld 2018). According to him, a country has a comparative advantage in the production of goods if the opportunity cost of the production of that certain good in terms of other is lower in that nation than in other nations (Jones and Weder, eds. 2017).
These two trade models are complimentary. Any realistic view of trade should give room for the importance of not just labor but other factors of production too, such as capital, land, and mineral resources (Guo 2015). It is thus the center stage of the Heckscher-Ohlin theory, which built more on the ideas that were highlighted by David Ricardo in his model. The Heckscher-Ohlin theory has thus presented a detailed interaction between the abundance and the intensity in a sharp look, by viewing at the long-run result when all the production factors become mobile across many sectors of life. Additionally, the two models contain a robust explanatory power in the determination of patterns of production internationally. Although there have been past documentation of this work, a joint of these two models model both production and demand for the first time. Here, reduced form coefficients are mapped with iceberg costs of transportation or elasticity of substitution as the structural parameters (Guo 2015).
The Heckscher-Ohlin theory has been very useful in the explanation of the African countries’ trade patterns. Taking an example of the travel service industry, it has grown in the African continent predominantly. These travel services are mainly determined by the service user and not the type of service being sold, unlike other traded service industries. Here, a traveler or the consumer travels to another nation to obtain the services or goods (Viljoen, Saayman, A. and Saayman, M. 2019). Tourism is used as the main reference for travel service exports. In the application of the Heckscher-Ohlin theorem, the African nations, in this international trade service exports, have an upper hand and advantageous in exporting these services. There has been a growth predicted in the industry with Africa posing a 5.7% growth in 2008, and 5.9% in South Saharan Africa. The rest of the world saw a 1% increase in the trade, therefore showing that Africa has faced a fast-growing tourism industry as their most important component of international trade. The top four tourist destinations in Africa are South Africa with 26.73%, Egypt with 24.96%, Morocco with 16.8%, and Tunisia with 7.74% (Fourie and Santana-Gallego 2013). The relevance of the Heckscher-Ohlin theory is that Africa is endowed with vast natural resources, fauna and flora, cultural heritage, scenic landscapes, sand and the sun, and the seas. All these come with low opportunity costs, thus using the supply-side factors as an advantage in the determination of flows of trade