Heckscher-Ohlin Theorem To Contemporary Trade Essay

Questions:

1.Write a Reports on Foreign Direct Investment by Industry in Singapore from 2010 to 2014 and analyse the reports.
2.Explain the Meaning of an Optimum Currency Area. Discuss the advantages of ASEAN forming an Optimal Currency Area.
3.What are the Factors member Countries should consider before ASEAN can adopt a Common Currency?

Answers:

1.An analysis of comparative advantage in Singapore using Heckscher-Ohlin theory.

Eli Heckscher (1919) and Bertil Ohlin were the proponents of the Heckscher-Ohlin theory usually referred to as HO model. According to this theory, a country will export goods that maximum utilizes the resources found in the country and which are in abundance and will import goods that utilize scarce resource found in the country.

According to Clarke & Kulkarrni, (2007), Singapore is a city-state which is heavily urbanized making natural resources such as land in the country to become highly scarce. Due to this challenge, Singapore has maximized on a strategy that focuses on value-added manufacturing to be economically competitive. Since 1968, Singapore has been importing raw material and exporting finished goods. Singapore also plays a huge role in the oil trade since it does not produce oil domestically it allowed Royal Dutch Shell and Esso establish their refining centers in the country. This has seen it become the third world largest oil refining center. Economically, Singapore mostly depends on trade. In relation to this theory Singapore can be considered to be an abundant capital country, and thus its exports are mainly capital intensive. The manufacturing foreign direct investment by industry has been growing steadily since 2010 to 2014. Therefore, Singapore still has a comparative advantage in the manufacturing sector.

2.Optimal currency area

According to Ivestomedia (2017), the term Optimal Currency area is used to refer to unionization of currency in a given geographical area with the aim of creating a greater economic benefit. Robert Mundell in 1960s proposed the optimal currency theory which opposed the tradition of having separate national currencies arguing that it was economically inefficient. According to Mundell, countries with common economic ties would benefit more economically by having a common currency. This is because common currency integrates the capital markets in different countries thus facilitating trade. However, common currency does not allow individual countries to direct fiscal and monetary policy interventions even when they face an economic crisis.

Advantages of forming an ASEAN optimal currency area

Common currency facilitates the growth of trade among the countries of the union which directly results in increased growth within the region. The common currency also helps in reducing transaction cost in business in international trade which improves the rate of exchange among the members of the union.

A common currency helps in ending internal currency instability since it fixes exchange rates and also the reduction of external currency instability thus increasing exporters which result in economic growth for the union members (Dalia, 2010). This would mostly benefit countries with weaker currencies.

A common currency would increase the transparency of prices among the members of the union. Where countries have different currencies it becomes difficult to compare the prices of goods and services but when using a common currency it becomes easier, and a firm can reduce their costs since it will be easier to access cheaper commodities.

3.Factors to consider before ASEAN can set a common currency

The degree of openness

Before establishing a common currency, ASEAN members should consider how many countries are open to the idea of having a common currency. A common currency would be appropriate for countries who have a degree of openness to trade. Countries with low levels of openness are not suited to form a common currency since there would be larger costs than benefits. A common currency would benefit countries with open economies since it would help in lowering transaction costs and risks.

Costs and benefits of a single currency

The countries should consider the benefits that would come as a result of using a common currency and the cost or disadvantages of having a common currency, if the advantages outweigh costs then it would be right to implement the ASEAN common currency. One of the main benefits of a common currency is that it reduces transaction cost. Therefore, companies and individual will incur lesser costs while carrying out business in the region.

A common currency also reduces the risk of losing money when transacting internationally. This usually results from the fluctuation in the value of internal currencies in relation to external currencies.

The major disadvantage or cost of a common currency is that member countries lose the freedom to make their monetary policies since common currency brings about a unified central bank. Since the countries have different economic goals and practices having a common fiscal policy by the central bank of the union would lead to an economic crisis that will affect the whole union.

References

Clarke, A. & Kulkarni, K., (2007). Texting the application of Heckscher-Ohlin theorem to contemporary trade between Malaysia and Singapore. Available at: {Accessed on 2nd May, 2017}

Investomedia, (2017). What is optimal currency area? Available at: {Accessed on 2nd May, 2017}

Dalia, (2010). Pros and cons of a single currency. Available at: {Accessed on 2nd May, 2017}

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