Parity theories analyse and operation in the global economy Essay

Parity theories analyse and operation in the global economy - Essay Example Another theory that advances a notion of equalization or parity is the Heckscher-Ohlin theory. The Hecksher-Ohlin theory is composed of two theorems. The first theorem explains and predicts comparative advantage. Ricardo’s theory of comparative advantage assumes but do not explain comparative advantage. The Heckscher-Ohlin Theory’s, particularly the first theorem of the theory, explains comparative advantage to be rooted the in relative factor abundance between nations. The second theorem of the Heckscher-Ohlin theory holds that when there are no restrictions to trade, there will be relative as well as absolute factor price equalisation. Factors of production are land, labour, and capital. The Heckscher-Ohlin asserts, however, that the theory is applicable for labour and capital. The Heckscher-Ohlin theory asserts that with trade liberalisation, mobility of goods can substitute for the mobility of factors and, because of this, relative and absolute factor price equalisa tion will be realized. ... that interest rates will move to parity as interest rates reflect the price of capital which is one of the factors of production and, based on Heckscher-Ohlin theory, mobility of goods substitutes for the mobility of factors and, thus, interest rates also move to parity. II. A main argument against parity theories: markets do not clear There are at least two major areas of the debate on the parity theories. One area of debates is whether markets really move towards equilibrium. Another area of the debate is on the empirical validity of the parity theories: the theories may appear logical but the predictions of the theories and/or their assumptions are not in accord with the situation in the real world. In other words, there are arguments that the theories may be logically constructed but they may not be empirically valid. We discuss empirical validity in the succeeding section and discuss in this section why some economists and critics do not believe why markets do not move towards e quilibrium. The perspective or assertion that markets clear is the more conventional and standard assumption in economics. This view is called the classical view (the more modern variants of this view are the neo-classical and new classical perspectives in economics). The classical view is the theory or perspective that is one of the most important building blocks in many theories of economics. However, another perspective that is also conventional but which has a less following in economics today is the Keynesian perspective.1 One variant of the Keynesian perspective asserts that markets do not clear because there are several obstacles to market clearing. It is a perspective that has a significant following and influence among economists. According to this variant of the Keynesian