Mzuvukile Ndamase
3829858
Compulsory Assignment Essay
INTERNATIONAL TRADE ECONOMICS (Eco335) Due date: 14.Oct.2023
Marks: 100
Topic Choice: 3. The Heckscher-Ohlin proposition states: “...a country will export
the good that intensively uses the relatively abundant factor of production.” Chose
an African country and find which goods that country imports and exports. Can the
H-O theory explain exports from this country?
Introduction
A proponent of the Heckscher-Ohlin model, which emphasizes the effect of trade on factor-price equalisation, contends that countries that possess abundant unskilled labour tend to specialise in exports that require unskilled labour, which increases the demand for lower-skilled workers according to Wood & Berge (1997). The wages of unskilled workers will increase compared to skilled workers, as a result, as found by Korinek (2005). In this paper, the focus is on intermediate inputs and total production output. To quantitatively assess this effect, I build a model featuring the exports and imports from and to Ghana, which interacts with foreign and domestic inputs at varying degrees of import substitution. Feenstra (2016) found that the increased availability of foreign intermediate imports means that there is a greater demand for skilled labour in this environment. Finding whether Ghanaian exports are influenced by the Heckscher-Ohlin method.
The aim of the research – is to analyse the case of Ghana’s exports in the framework of the Heckscher-Ohline international trade theory.
The objective of the research – is Ghana’s exports in the framework of the Heckscher-Ohlin model.
Methodology – Essay methods include academic literature review, qualitative, quantitative, and comparative statistical analysis of empirical data.
Heckscher-Ohlin Model
Heckscher-Ohlin-Vanek was an exceedingly popular model in trade theory until the 1980s. The ratio of factor endowment differs between capital and labour in the two economies. The endowments of the factors are also fixed. Two types of products are produced in Ghana's economy, such as agricultural products and manufactured products. With the constant return to scale property, the production function competes perfectly with the production function. If the price ratio of production factors changes, the capital (labour) intensive good stays the capital (labour) intensive good argued by Markusen and Maskus (2011). A common and homothetic social welfare function in these two economies is set up, meaning that consumption expenditures
are decided when the relative price is found regardless of income level. A one-to-one income elasticity between the two goods exists.
A Factor production can move within an economy without incurring any costs, but it can uncross borders. A free trade agreement allows two goods to be traded without incurring any costs.
Aggrey, Eliab and Joseph (2010) have found that labour-intensive goods abundant in labour are being exported, while capital-intensive goods abundant in the country’s capital are exported.
Aggrey, Eliab and Joseph (2010) further said that Heckscher-Ohlin's approach infers that distinctive endowments of resources are the introductory reason for foreign exchange. Aldona Juozapavičienė & Vilis Eizentas (2010) found that if A country is capital abundant against country B, the ratios of capital per employee (K refers to the capital stock, while L is labour force in each country) can be expressed as K(a)/L(a) > K(b)/L(b). In contrast, if country A is labour abundant, the second formula is used to define the capital-to-labour ratios: K(a)/L(a) <
K(b)/L(b).
For the H-O model to be completely substantial, certain presumptions around the world’s economy must be made as stated by Winters (1994): i) usage capacities are indistinguishable among the nations and buyers confronting homogeneous preferences; ii) The production technology is similar and constant throughout the worldwide in various countries; iii) The production comes about in consistent returns to scale, though the marginal returns to any single factor are diminishing; iv) The products are distinctive in their specialised necessities of capital and work per unit. Furthermore, this results in any combination of factor costs and leads to a clear division of more labour-intensive and capital-intensive goods; v) Both resource and product markets are based on perfect competition; vi) Foreign trade faces no restrictions (such as duties, standards, or transportation costs), but the labour relocation or outside speculation (foreign) into capital resources.
GHANA'S INTERNATIONAL TRADE AND ECONOMY Imports Analysis
Import substitution strategies are to reduce imports and promote locally produced goods with the intention to capitalise through exports. This strategy of import substitution has been adopted by several underdeveloped countries, including Ghana, but it has not worked as expected. To
industrialise and replace imports with domestic production, Ghana adopted policies that led to the balance of payments problems, as found by Isaac Okyere & Liu Jilu (2020). Imports to Trend Ghana have increased over time, suggesting that import trade has soared overall. As the domestic supply of capital and intermediate goods falls, and consumer demand for imported goods increases, the import sector plays a critical role in offsetting the shortage.
According to Isaac Okyere & Liu Jilu (2020), Ghana's import trade grew by 14.50% on average between 1990 and 2011, which shows a satisfactory performance compared to the sub-Saharan average during that period. Ghana’s principal imports are Manufactured products dominate Ghana's imports, accounting for 65% of annual imports over the period of record, followed by fuel (17%) and all food (6%). Travel services make up 15%of total service imports, while transport services account for 44%, followed by other services. Despite contributing to most of Ghana's service imports, transport services have grown less slowly than other service sectors. In terms of global merchandise imports, petroleum products, bitumen, minerals, and crude oils accounted for 9% of Ghana's imports between 1995 and 2014, as found by Nomfundo &
Odhiambo (2017). In addition to trading with developed countries, the nation trades with emerging markets. Over the period 1995–2002, Ghana imported most of its imports from developing countries. Nevertheless, after 2002, developing-country imports began to steadily rise while developed-country imports started to decline.
The requirements for imports and exchange openness in Ghana have not been moving together over the period 1995 to 2014. During the primary six years (1995–2000), patterns of exchange openness revealed a slow increment in exports, with many declines between, and within the request for imports and then followed by a slow rise. Between 2001 and 2006, exchange openness declined, while imports went ahead to rise. The decrease in trade openness can be ascribed to the exchange arrangement alteration that occurred in 2000, which involved increasing taxes and the re-introduction of an uncommon import charge. After 2006, exchange openness started to increase gradually, while imports have begun to go within the inverse course according to Nomfundo & Odhiambo (2017).
Exports Analysis
Amadu & Danquah (2019) found that it was decided that Ghana exported traditional and non- traditional export (NTEs) commodities. In traditional exports, raw materials, and primary
commodities such as cocoa beans, gold, diamonds, bauxite, and manganese, are primarily exported. Other non-traditional exports, such as handicrafts, aluminium products, and horticulture products GEPC (1986). In Ghana's rural communities, (NTEs) non-traditional exports can create many jobs and generate income. Non-traditional exports have therefore been considered a method for reducing poverty, as found by Isaac Okyere & Liu Jilu (2020).
NTEs comprise four broad subsectors: agricultural commodities, processed goods, semi- processed goods, and crafts. Agricultural resources classified as non-traditional include horticulture, fisheries, game and wildlife, and various vegetables and plants such as okra, and marrow, in addition to fresh fruits such as pineapples, mangoes, medicinal seeds, tropical flowers, and tropical flowers as found by Ouma, S. (2015). These include yams, natural rubber, cotton seeds, kola nuts, corn, coconuts, assorted fruits, and lobsters/shrimps/prawns. The prepared and semi-consumer items are often made up of wood items, imported merchandise such as pharmaceuticals, electric cables and aluminium items, canned nourishment and drinks, and other processed items GEPA (2013). Resources supplied include tourism drugs, financial services, and education.
Heckscher-Ohlin Model's Connection to Ghana's Exports
Darkwah and Verter (2014) examine the factors that influence cocoa production in Ghana. The model shows a long-term equilibrium relationship among the variables. The results reveal that cocoa production is positively affected by factors such as farm size, economic growth, and exports. According to Borkakoti (1998) based on Ricardo’s (Ricardian Model) theory of comparative advantages, the Heckscher-Ohlin model in disagreement with the single-factor model and supports that countries should be able to produce (specialise) and export products with relative factor endowments. Their results show that there is an opposite relationship between world prices and exports, contrary to what was expected. To protect local farmers from price volatility, the Ghanaian government has set up a strict pricing policy for cocoa products.
Nigeria is the fourth-largest cocoa producer worldwide, behind Côte d’Ivoire and Ghana. This means that Nigeria, Cote d'Ivoire, and Ghana have a competitive advantage in both production and exportation. This is due to the favourable tropical climatic conditions found in these
countries, as well as the other major producing economies. Gandolfo (2013) argued that favourable tropical climate conditions allow countries to take advantage of their comparative advantages by cultivating the crop as proposed by the Hecksher-Ohlin and Ricardian models, as found by Verter (2016). Penultimately, according to Armah (1993), historical trends in employment support the Heckscher-Ohlin Theorem, explicitly when broken down by sector trends in employment.
In conclusion, total employment growth rates do not always rise during periods of export promotion. This trend could be explained by interfering variables, including policies that cut redundancies within the public sector. Disaggregating employment by sector shows that there is a persistently higher rate of employment growth in export-oriented industries than in those that favour import substitution. This tends to confirm the relative higher employment-generating potential of export promotion. The study's findings confirm the importance of labour-intensive exports for employment. However, some features make primary export production undesirable as a long-term development strategy. Policymakers must weigh the benefits of primary export production against wider economic costs.
REFERENCE LIST Textbooks
-Markusen, J. R., Melvin, J. R., Kaempfer, W. H., & Maskus, K. E. (1995). International trade:
Theory and evidence (pp. 281-285). New York: McGraw-Hill.
-Borkakoti, J. (2017). International trade: causes and consequences. Bloomsbury Publishing (pp.
97-99)
-Gandolfo, G. (2013). International Economics II: International Monetary Theory and Open- Economy Macroeconomics. Springer Science & Business Media (pp.33-37)
-Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university press.
-Ouma, S. (2015). Assembling export markets: The making and unmaking of global food connections in West Africa. John Wiley & Sons.
Journals
-Adrian Wood & Kersti Berge (1997) Exporting manufactures: Human
resources, natural resources, and trade policy, The Journal of Development Studies, 34:1, 35-59.
-Aggrey, N., Eliab, L., & Joseph, S. (2010). Determinants of export participation in east African manufacturing firms. Current Research Journal of Economic Theory, 2(2), 55-61.
-Amadu, A. W., & Danquah, M. (2019). R&D, human capital and export behavior of manufacturing and service firms in Ghana. Journal of African Business, 20(3), 283-304.
-Armah, B. (1993). trade structures and employment growth in Ghana: A historical comparative analysis: 1960-89. African Economic History, (21), 21-36.
-Darkwah, S. A., & Verter, N. (2014). An empirical analysis of cocoa bean production in Ghana.
European Scientific Journal, 10(16).
-Korinek, J. (2005). Trade and gender: Issues and interactions.
-Juozapavičienė & Vilis Eizentas (2010). Lithuania exports in the framework of heckscher-ohlin international trade theory: Ekonomika ir vadyba, Nr. 15, p. 86-92.
-Nomfundo, P. V., & Odhiambo, N. M. (2017). A review of imports structure and reforms in Ghana. EuroEconomica, 36(1).
-Okyere, I., & Jilu, L. (2020). The impact of export and import to economic growth of Ghana.
European Journal of Business and Management, 12(21), 130-138.
-Verter, N. A. H. A. N. G. A. (2017). The impact of agricultural foreign aid on agriculture in Nigeria. Bulgarian Journal of Agricultural Science, 23(5), 689-697.
-Winters, A. L. (1994) International economics. London: Routledge
