Monday, May 10, 2021

The modern theory of international trade

The modern theory of international trade

The modern theory of international trade ,  Its need to understand the modern theory of trade we see there is few theories which are given for the Modern Theory.

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.”