One of the important changes in the world economy over the past three decades has been the rapid increase in capital investment in the countries of the Pacific Basin (notably Japan and Korea). What are the implications of this investment for the commodity patterns of trade of these two countries say with respect to the US if the HO theory is correct? Explain carefully
To determine the implications of the rapid increase in capital investment in Japan and Korea on their commodity patterns of trade with the US, let's first understand the concept of the Heckscher-Ohlin (HO) theory. The HO theory is an economic theory that suggests that countries will specialize in and export goods that utilize their abundant factors of production, while importing goods that require their scarce factors of production.
Given this theory, if the HO theory is correct, the implications of the increased capital investment in Japan and Korea on their commodity patterns of trade with the US would be as follows:
1. Capital-Intensive Goods: As capital investment increases in Japan and Korea, it would lead to a higher availability of capital in these countries. According to the HO theory, countries abundant in capital tend to specialize in producing capital-intensive goods. Therefore, Japan and Korea would likely increase their production and export of capital-intensive goods.
2. Labor-Intensive Goods: Conversely, as capital investment increases, it may result in a scarcity of labor relative to capital in Japan and Korea. According to the HO theory, countries relatively scarce in labor tend to specialize in producing labor-intensive goods. As a consequence, Japan and Korea may reduce their production and import more labor-intensive goods from countries like the US.
3. Commodity Patterns of Trade: Applying the HO theory, the increased capital investment in Japan and Korea would likely lead to a change in their commodity patterns of trade with the US. Japan and Korea would tend to export more capital-intensive goods to the US, taking advantage of their capital abundance, while importing more labor-intensive goods from the US, benefiting from the US's labor abundance.
Overall, if the HO theory holds, the rapid increase in capital investment in Japan and Korea would influence their trade with the US by shifting their specialization towards capital-intensive goods for export and labor-intensive goods for import.