The
modern theory of international trade
General Features of Modern
Theory:
Heckscher-Ohlin theory
is understood as modern theory of international trade. it had been first
formulated by Swedish economist Heckscher in 1919 and afterward fully developed
by his student Ohlin in 1935. Heckscher-Ohlin theory, also called the factor
endowments theory of international trade, attempts to elucidate that
international trade is just a special case of inter-local or inter-regional
trade, and there's no need for a separate theory of international trade.
It emphasises that
differences in factor endowments, and not differences in factor efficiency as
maintained within the classical theory, are truth basis of international trade.
The modern theory of international trade The following are the general features of the
modern theory of international trade:
i. No Need for a Separate Theory:
According to the
classical economists, international trade was basically different from internal
trade. Therefore, there's a requirement for a separate theory of international
trade. The difference between the international trade and internal trade arises
thanks to various sorts of differences between the countries, such as- the
fashionable theory of international trade (a) differences in efficiency in
producing different goods; (b) immobility of things of production; (c) barriors
caused by distance and other physical factors; (d) use of various currencies;
(e) existence of artificial barriers, like customs duties and other
restrictions on trade; etc.
All such differences
exist between the countries and not within a rustic , and hence a requirement
for a separate theory of international trade. Ohlin, on the contrary, believes
that there's no basic difference between local or inter-regional trade and
international trade, and no separate theory of international trade is required
. the fashionable theory of international trade, He remarked- “International
trade is but a special case of inter-local or inter-regional trade.”
ii. A General Theory of Value:
Heckscher-Ohlin
theory is considered as a general equilibrium theory of value at the
international level. According to the theory of value, at the equilibrium
level, demand is equal to supply and commodity price is equal to average cost
of production.
Heckscher-Ohlin theory emphasises the mutual interdependence
of the prices of commodities, the prices of factors of production, the demand
for commodities, and the demand and supply of factors of production in
international trade. The modern theory of international trade, Thus, while
Marshall explains the time- dimension of general theory of value,
Heckscher-Ohlin theory explains the space-dimension (i.e., international trade)
of the general theory of value.
iii. Supplement to Ricardian
Theory:
Heckscher-Ohlin
theory supplements, and not supplants, the Ricardian comparative cost theory of
international trade. According to the Ricardian theory, the differences in the
comparative costs provide the foundation on which the international trade is
possible. But, it does not tell- why do the costs differ?
Ohlin’s
theory not only accepts the comparative advantage as the basis of international
trade, but also further develops the Ricardian theory by providing answer to
the above question.
iv. Factor Endowments Theory:
Heckscher-Ohlin
theory is known as factor endowments theory or factor proportions theory
because it emphasises the interplay between the proportions in which different
factors of production are available in different countries, and the proportions
in which they are used in producing different goods. True basis of
international trade is to be found in the comparative advantage that emerges
due to the difference in the factor endowments.
The modern theory of international trade Besides the Heckscher-Ohlin theorem, the
modern theory also includes three other closely related theorems:
(a) Factor-Price Equalisation Theorem:
An important
implication of the Heckscher-Ohlin theorem is that free international trade
between two countries will cause factor prices in the countries to become more
equal. If both countries continue to produce both goods with free trade, their
factor prices will actually be equal.
(b) Stolper-Samuelson Theorem:
This theorem
links international trade to the domestic distribution of income. It states
that an increase in the relative price of the labour- intensive good will increase
the labour price relative to both commodities prices and reduces the other
factor prices relative to both commodity prices.
(c) Rybczynski Theorem:
This theorem
relates trade with economic growth. It states that at constant prices, an
increase in one factor endowment will increase by a greater proportion the
output of the good intensive in that factor and will reduce the output of the
other good.
Assumptions of the Theory:
Ohlin’s simplified model is based on the following assumptions:
(i) it's a 2
x 2 x 2 model. That is, there are two countries (A and B); there are two
commodities (X and Y); there are two factors of production (labour and
capital).
(ii) Country
A is labour-abundant and country B is capital-abundant.
(iii)
Similarly, commodity X is labour-intensive and commodity Y is capital
intensive.
(iv) there's
perfect competition in both commodity market and therefore the factor market.
(v) there's
financial condition .
(vi) Factors
of production are perfectly mobile within each country but perfectly immobile
between the countries.
(vii) There
are not any transport costs.
(viii)
Production functions are different for various commodities, but are similar for
every commodity in both countries.
(viii) Production functions are different for various
commodities, but are similar for every commodity in both countries.
Explanation of Heckscher-Ohlin
Theory:
The modern theory of international trade Heckscher-Ohlin theory is that
the factor endowment theory which explains the pattern of comparative advantage
and hence the pattern of trade terms of factor endowments. the idea states that
a rustic features a comparative advantage within the production and export of
the great that's relatively intensive within the country’s relatively abundant
factor.
In other words, the idea predicts that goods
requiring greater amounts of labour should be produced in countries where
labour is abundant relative to other factors of production, and where the
labour costs are therefore low relative to cost of other factors. These
countries then export labour-intensive goods to other countries where labour is
comparatively scarce and labour costs are relatively high.
In the words of Ohlin-
“Generally, abundant factors are relatively cheap, scanty factors are
relatively dear, in each region. Commodities requiring for his or her
production much of the previous and tiny of the latter are exported in exchange
for goods that decision for factors within the opposite proportions. Thus,
indirectly, factors in abundant supply are exported and therefore the factors
in scanty supply are imported.”
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